In this arena, the Internal Revenue Service decides whether an individual should be classified as an Independent Contractor or an Employee…not you…not the individual in question.

To help make a proper determination, here are some basic questions to ask and answer honestly:

1. Do you have the right to direct and control what work is done, and how it is done, through instructions, training, or some other way?
2. Do you have the right to direct or control the financial and business aspects of the job? For example:
   1. Does the individual have extensive unreimbursed business expenses?
   2. Who owns the tools that are used for the job?
   3. Does the individual have the right to offer his services to others in general?
   4. How do you pay this individual? Flat fee? Hourly? Salary?
   5. Can the individual realize a profit or loss from the work?
3. What kind of relationship is there between you and the individual?
   1. Do you have a written contract?
   2. Do you provide any employee-type benefits to the individual?
   3. How permanent is your relationship with the individual?
   4. Are the services provided by the individual a significant part of your business as a whole?
   5. Does the individual believe they are an employee? Do they believe they will be eligible for unemployment benefits if you terminate their services?

No one part of the above is weighted more heavily than the other parts. They are considered as a whole to determine employee status.

If your answer is “It doesn’t apply to me, so who cares?”, don’t fool yourself! If you use the services of independent contractors, you need to make sure that is what they are…not employees in disguise.

The Internal Revenue Service, federal and state Labor Departments, and state Revenue Departments are all looking for misclassified workers. If they happen to find any during their audits, rest assured that those results are going to be shared with other agencies, which will create a veritable nightmare of wage issues to include minimum wage and overtime, back taxes and penalties for Social Security, Medicare, federal and state unemployment taxes, state withholding, and, if applicable, local withholding. It may also trigger worker’s compensation benefits for any injured reclassified individual, and possibly employee benefits such as health insurance and retirement plan participation.