The Line Between Independent Contractor and Employee

Posted by: Rod Kurtz on December 27, 2005

A lot of businesses would prefer to treat workers as independent contractors, rather than employees, for various tax and liability reasons. However, it’s important to have a good understanding of just what separates an independent contractor from an employee…unless you want to experience the wrath of your state tax department and the Internal Revenue Service.

The general rule is that an independent-contractor relationship exists if you can control the result of the work, but not the means and methods of accomplishing that result. To determine independent-contractor classification, you should answer “yes” to these questions:

• Is there risk of profit and loss to the individual?
• Does the individual have the authority to delegate responsibility?
• Does the individual provide his own work location, tools, and equipment?
• Does the individual have unrestricted control over the work schedule?
• Does the individual have control over when, where, and how the work is done?
• Does the individual incur nonreimbursed expenses in the completion of tasks?
• Is the individual free to provide similar work for others?
• Is there a formal agreement defining scope of work, compensation, conditions, and statement of independent-contractor basis?

Although the above restrictions aren’t inclusive and may vary from situation to situation, they do provide a general outline of IRS tests. To determine a worker’s status, get more information from your state employment office and IRS Publication 15A, “Employment Taxes and Information Returns,” at www.irs.gov

Gene Fairbrother
ShopTalk 800® Business Consultant
National Association for the Self-Employed
Dallas

Reader Comments

JetRod Crew

December 27, 2005 7:32 PM

Thank you for your information I will use it in my research.

Get the List Get the Money

Mary Box

August 19, 2006 6:56 AM

You can't be serious?!

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