Employee or Independent Contractor?

(reprint of IRS rulings)

Note: While this is an IRS audit ruling, State of Indiana agrees with the definition as well.

Workers are either one or the other, and many times companies treat individuals incorrectly can face severe penalties by not recognizing the differences.

Individuals that are considered Independent or Subcontractors, when they are actually employees, could be missing out on Workers Compensation Benefits, Unemployment Insurance, Group Health/Life and possibly retirement benefits. An employer / company who does not classify the individual properly can have the IRS, Indiana Industrial Board, as well as the individual person, suing and levying stiff penalties and fines.

To be an independent contractor, a person who provide services should, among other things, be legally established as a separate business, maintain offices apart from yours, and submit invoices on his own stationary. Under the Internal Revenue Services 20 part test, a person is an employee, rather than an independent contractor, if that individual:

  1. Must comply with company instructions about when, where and how the work is to be carried out.
  2. Is trained by the company.
  3. Performs duties integrated into the company’s general operations.
  4. Must do the work personally.
  5. Is primarily responsible for providing a service, and the company hires, supervises and pays assistants.
  6. Maintains a continuing relationship – even one in which work is performed at irregular but frequent intervals – with a company.
  7. Works a schedule set by the company.
  8. Is substantially a full-time worker.
  9. Works on company premises.
  10. Performs duties in an order or sequence set by the company.
  11. Must submit regular or written reports to the company.
  12. Is paid by the hour, week or month.
  13. Is ordinarily compensated by the company for job-related expenses.
  14. Uses a significant amount of company-provided tools and materials.
  15. Has no investment in the resources required to perform the service.
  16. Cannot realize a profit or suffer a loss through the provision of the service.
  17. Does not work for more than one company at the same time.
  18. Does not consistently seek work from the general public.
  19. Can be fired for reasons other than failure to produce results specified in a contract.
  20. Can quit at any time without incurring a liability.

For further information, you can get Publication 937, “Employment Taxes and Information Returns” and form SS-8, “Determination of Employee Work Status for Purpose of Federal Employment Taxes and Income Tax Withholding.” Both are free by calling 1-800-829-3676.