IRS 20 Factor Test Independent Contractor or Employee?

Transcription

1 IRS 20 Factr Test Independent Cntractr r Emplyee? The IRS test ften is termed the right-t-cntrl test because each factr is designed t evaluate wh cntrls hw wrk is perfrmed. Under IRS rules and cmmn-law dctrine, independent cntractrs cntrl the manner and means by which cntracted services, prducts, r results are achieved. The mre cntrl a cmpany exercises ver hw, when, where, and by whm wrk is perfrmed, the mre likely the wrkers are emplyees, nt independent cntractrs. A wrker des nt have t meet all 20 criteria t qualify as an emplyee r independent cntractr, and n single factr is decisive in determining a wrker's status. The individual circumstances f each case determine the weight IRS assigns different factrs. NOTE: Emplyers uncertain abut hw t classify a wrker can request an IRS determinatin by filing Frm SS-8, Determinatin f Emplyee Wrk Status fr Purpses f Federal Emplyment Taxes and Incme Tax Withhlding. Hwever, sme tax specialists cautin that IRS usually classifies wrkers as emplyees whenever their status is nt clear-cut. In additin, emplyers that request an IRS determinatin lse certain prtectins against liability fr misclassificatin. The 20 factrs used t evaluate right t cntrl and the validity f independent cntractr classificatins include: Level f instructin. If the cmpany directs when, where, and hw wrk is dne, this cntrl indicates a pssible emplyment relatinship. Amunt f training. Requesting wrkers t underg cmpany-prvided training suggests an emplyment relatinship since the cmpany is directing the methds by which wrk is accmplished. Degree f business integratin. Wrkers whse services are integrated int business peratins r significantly affect business success are likely t be cnsidered emplyees. Extent f persnal services. Cmpanies that insist n a particular persn perfrming the wrk assert a degree f cntrl that suggests an emplyment relatinship. In cntrast, independent cntractrs typically are free t assign wrk t anyne. Cntrl f assistants. If a cmpany hires, supervises, and pays a wrker's assistants, this cntrl indicates a pssible emplyment relatinship. If the wrker retains cntrl ver hiring, supervising, and paying helpers, this arrangement suggests an independent cntractr relatinship. Cntinuity f relatinship. A cntinuus relatinship between a cmpany and a wrker indicates a pssible emplyment relatinship. Hwever, an independent 1

2 cntractr arrangement can invlve an nging relatinship fr multiple, sequential prjects. Flexibility f schedule. Peple whse hurs r days f wrk are dictated by a cmpany are apt t qualify as its emplyees. Demands fr full-time wrk. Full-time wrk gives a cmpany cntrl ver mst f a persn's time, which supprts a finding f an emplyment relatinship. Need fr n-site services. Requiring smene t wrk n cmpany premises particularly if the wrk can be perfrmed elsewhere indicates a pssible emplyment relatinship. Sequence f wrk. If a cmpany requires wrk t be perfrmed in specific rder r sequence, this cntrl suggests an emplyment relatinship. Requirements fr reprts. If a wrker regularly must prvide written r ral reprts n the status f a prject, this arrangement indicates a pssible emplyment relatinship. Methd f payment. Hurly, weekly, r mnthly pay schedules are characteristic f emplyment relatinships, unless the payments simply are a cnvenient way f distributing a lump-sum fee. Payment n cmmissin r prject cmpletin is mre characteristic f independent cntractr relatinships. Payment f business r travel expenses. Independent cntractrs typically bear the cst f travel r business expenses, and mst cntractrs set their fees high enugh t cver these csts. Direct reimbursement f travel and ther business csts by a cmpany suggests an emplyment relatinship. Prvisin f tls and materials. Wrkers wh perfrm mst f their wrk using cmpany-prvided equipment, tls, and materials are mre likely t be cnsidered emplyees. Wrk largely dne using independently btained supplies r tls supprts an independent cntractr finding. Investment in facilities. Independent cntractrs typically invest in and maintain their wn wrk facilities. In cntrast, mst emplyees rely n their emplyer t prvide wrk facilities. Realizatin f prfit r lss. Wrkers wh receive predetermined earnings and have little chance t realize significant prfit r lss thrugh their wrk generally are emplyees. Wrk fr multiple cmpanies. Peple wh simultaneusly prvide services fr several unrelated cmpanies are likely t qualify as independent cntractrs. 2

3 Availability t public. If a wrker regularly makes services available t the general public, this supprts an independent cntractr determinatin. Cntrl ver discharge. A cmpany's unilateral right t discharge a wrker suggests an emplyment relatinship. In cntrast, a cmpany's ability t terminate independent cntractr relatinships generally depends n cntract terms. Right f terminatin. Mst emplyees unilaterally can terminate their wrk fr a cmpany withut liability. Independent cntractrs cannt terminate services withut liability, except as allwed under their cntracts. Are Independent Cntractrs Emplyees? Because FLSA applies nly t emplyer-emplyee relatinships, independent cntractrs are nt cvered. Curt decisins interpreting FLSA cverage rules require that emplyers use an ecnmic reality test in determining whether an emplyment relatinship exists with respect t a given wrker. Similar t the cmmn law test, the ecnmic reality test fcuses n the degree f cntrl exercised by the emplyer as an essential factr in determining whether an emplyeremplyee relatinship exists. While n single factr is cntrlling r decisive in determining whether an emplyment relatinship exists, the facts and circumstances that curts and federal enfrcement fficials examine in deciding whether an individual is an emplyee r an independent cntractr are: the degree t which the emplyer cntrls r directs the manner in which wrk is perfrmed, whether the wrker's pprtunity fr prfit r lss depends n his r her managerial skills, whether the wrker's duties are perfrmed fr the emplyer n an nging r permanent basis, whether the service perfrmed by the wrker is an integral part f the emplyer's business, the extent f the wrker's investment in equipment r materials needed t perfrm the jb, and the degree t which the wrker is engaged primarily fr the benefit f the emplyer. The IRS cnsiders a wrker t be yur emplyee if yu have the right t cntrl nt nly what wrk will be dne, but als hw the wrker will d it. If yu treat a wrker as an independent cntractr, but the IRS decides yu have sufficient cntrl ver the wrker 3

4 t create an emplyment relatinship, the IRS can hit yu with a cstly bill fr the emplyment taxes yu shuld have been withhlding and paying. When deciding whether yu can safely treat a wrker as an independent cntractr, there are tw separate tests yu shuld cnsider: The cmmn law test; and The reasnable basis test. The cmmn law test: IRS examiners use the 20-factr cmmn law test t measure hw much cntrl yu have ver the wrker. These factrs are reflected n IRS Frm SS-8, (this frm can be dwnladed at Determinatin f Emplyee Wrk Status fr Purpses f Federal Emplyment Taxes and Incme Tax Withhlding. Yu can fill ut the SS-8, including the facts f yur relatinship with the wrker, and submit it t the IRS t get a determinatin f whether the wrker is yur emplyee r nt. Hwever, many cmpanies simply use the SS-8 as a self-audit t avid a misclassificatin trap; they dn't actually submit the frm t the IRS. Of curse, many wrkers the IRS estimates as many as 85% f all Frm SS-8 filers submit the frm t the IRS because they want t cntest their treatment as independent cntractrs. But the issue f wh has the right t cntrl is ften nt clear-cut, and the Tax Cde desn't define emplyee. S, the IRS develped the 20-Factr Test t arrive at an answer. The IRS later refined this test it added fur new, critical factrs and added mre weight t sme and de-emphasized thers in the riginal 20. Yu dn't need t have all the factrs in yur favr t be able t treat a wrker as an independent, but yu are mre likely t pass the cmmn law test if the mre imprtant factrs pint t independence. Accrding t the manual the IRS uses t train its wrker classificatin auditrs, the three mst imprtant factrs are: Instructins t wrkers: Yur wrker is prbably an emplyee if yu require him r her t fllw instructins n when, where, and hw wrk is t be dne. This is a very imprtant factr. Hwever, if yu tell yur electrician yu want blue switch plate cvers instead f white, yu are nt exercising cntrl t a degree that wuld make the persn an emplyee. Jb training: If yur cmpany prvides r arranges fr training f any kind fr the wrker, this is a sign yu expect wrk t be perfrmed in a certain way; therefre, the wrker is yur emplyee. Training can be as infrmal as requiring the wrker t attend meetings r wrk alng with smene wh's mre experienced. 4

5 Wrker's ability t make a prfit r suffer a lss: An emplyee may be rewarded, disciplined, demted, r fired depending n jb perfrmance, but nly an independent cntractr can realize a prfit r incur a financial lss frm his r her wrk. In ther wrds, an emplyee will always get paid; an independent cntractr, hwever, has a financial stake in his enterprise. IRS als gives high pririty t the fllwing factrs: W-2 r 1099: Yu reprt payments t independents (if they ttal $600 r mre in a calendar year) n Frm 1099-MISC. Reprting n a Frm W-2 indicates that bth yur cmpany and the wrker cnsider the wrker t be yur emplyee. Intent f yur cmpany and f the wrker: T build a slid case, yu and the wrker shuld sign a written agreement stating the wrker is an independent cntractr wh will be paid by the jb r prject, prvide his r her wn tls, etc. Pay basis: If yu pay a wrker n an hurly, weekly, r mnthly basis, the IRS will cnsider it a sign the wrker is yur emplyee. An independent is generally paid by the jb, prject, assignment, etc., r receives a cmmissin r similar fee. Benefits: Prviding benefits ther than pay are a strng indicatr f emplyee status. Incrprated status: Wrkers wh are incrprated are generally cnsidered t be wrking fr themselves, nt as yur emplyee. Imprtance f the wrker's services: If a wrker prvides services that are integral t the success f yur business, the wrker is likely yur emplyee. Persnal perfrmance f services: An independent cntractr shuld have the freedm t hire assistants r subcntract wrk t ther wrkers r firms at his r her expense (this is where prfit r lss culd enter the picture). If yu require the wrker t perfrm the wrk persnally, that's a sign f cntrl and therefre indicative f emplyee status. Prviding assistants: There's likely an emplyer-emplyee relatinship if yur cmpany hires, supervises, and pays assistants fr the wrker. Onging relatinship: The wrker desn't have t wrk fr yu cntinuusly t be cnsidered an emplyee; it may be enugh if the wrker gets assignments at frequently recurring, even if irregular, intervals. Setting the rder r the sequence f the wrk: If yu determine what gets dne when, it indicates yu cntrl hw the wrk is perfrmed. Allw an independent t decide his r her schedule, bth day-t-day and fr the lnger term. The reasnable basis test: While the cmmn law test lks at the nature f the wrking relatinship, the reasnable basis test is based n hw the curts and the IRS have classified similar wrkers in yur cmpany r yur industry in the past. 5

6 The reasnable basis test is cnsidered a safe harbr. That is, if yu can shw yu had a reasnable basis fr treating a wrker as an independent cntractr, the IRS is prhibited frm reclassifying the wrker as yur emplyee either prspectively r retractively. Yu have a reasnable basis fr treating a wrker as an independent if ne r mre f the fllwing cnditins exist: A curt ruling in favr f treating wrkers in similar circumstances as nn-emplyees; A ruling by the IRS (usually a Revenue Ruling) stating that similar wrkers are nt emplyees subject t emplyment taxes; An IRS Technical Advice Memrandum r Private Letter Ruling issued t yur cmpany, indicating that the particular wrker isn't an emplyee; A past IRS payrll audit that didn't find wrkers in similar psitins at yur cmpany t be emplyees; r A lngstanding, widely recgnized practice in yur industry f treating similar wrkers as independent cntractrs. NOTE: The Treasury Inspectr General fr Tax Administratin has recmmended that IRS pursue legislative prpsals that wuld mandate withhlding f incme taxes n payments made t independent cntractrs and require mnthly estimated tax payments. TIGTA made these recmmendatins in rder t curtail estimated tax payment nncmpliance. The fllwing infrmatin was taken frm the IRS website in 2006 Emplyee r Independent Cntractr? Whether smene wh wrks fr yu is an emplyee r an independent cntractr is an imprtant questin. The answer determines yur liability t pay and withhld Federal incme tax, scial security and Medicare taxes, and Federal unemplyment tax. In general, smene wh perfrms services fr yu is yur emplyee if yu can cntrl what will be dne and hw it will be dne. The curts have cnsidered many facts in deciding whether a wrker is an independent cntractr r an emplyee. These facts fall int three main categries: Behaviral Cntrl Facts that shw whether the business has a right t direct and cntrl. These include: Instructins - an emplyee is generally tld: 1. when, where, and hw t wrk 2. what tls r equipment t use 3. what wrkers t hire r t assist with the wrk 4. where t purchase supplies and services 5. what wrk must be perfrmed by a specified individual 6. what rder r sequence t fllw 6

7 Training an emplyee may be trained t perfrm services in a particular manner. Financial Cntrl Facts that shw whether the business has a right t cntrl the business aspects f the wrker s jb include: The extent t which the wrker has unreimbursed expenses The extent f the wrker s investment The extent t which the wrker makes services available t the relevant market Hw the business pays the wrker The extent t which the wrker can realize a prfit r lss Type f Relatinship Facts that shw the type f relatinship include: Written cntracts describing the relatinship the parties intended t create Whether the wrker is prvided with emplyee-type benefits The permanency f the relatinship Hw integral the services are t the principal activity * See next page fr an example f an Independent Cntractr Agreement. The Agreement is prvided as an example dcument, A-Plus Benefits, Inc. des nt endrse the dcument nr act as legal cunsel fr its clients. 7

8 Example: Independent Cntractr Agreement AGREEMENT BETWEEN Name f Organizatin (hereinafter Cmpany ) lcated at [address] and [name f cntractr], an Independent Cntractr ("Independent Cntractr"). The Independent Cntractr shall be identified as fllws: Name: Name cntractr (hereinafter Independent Cntractr) Type f Entity: Individual Sle prprietrship Partnership Crpratin Address: City/State/ZIP: Business Telephne: Scial Security r Emplyer Identificatin Number: IN CONSIDERATION f the prmises and mutual cvenants and agreements cntained herein, the parties agree as fllws: Wrk t Be Perfrmed Cmpany desires that the Independent Cntractr perfrm, and the Independent Cntractr agrees t perfrm, the fllwing wrk: Term f Agreement The services called fr under this Agreement shall cmmence n [date] and terminate n [date]. Technical Directin The Independent Cntractr shall receive technical directin nly frm [name] r his r her designee, as authrized in writing. Terms f Payment Cmpany shall pay the Independent Cntractr accrding t the fllwing terms and cnditins: 8

9 Reimbursement f Expenses Cmpany shall nt be liable t the Independent Cntractr fr any expenses paid r incurred by the Independent Cntractr unless therwise agreed t in writing. Federal, State, and Lcal Payrll Taxes Cmpany shall nt withhld r pay federal, state, r lcal incme taxes r payrll taxes f any kind n behalf f the Independent Cntractr r the emplyees f the Independent Cntractr. Cmpany shall nt treat the Independent Cntractr as an emplyee with respect t the services perfrmed hereunder fr federal, state, r lcal tax purpses. Ntice t Independent Cntractr Abut Its Tax Duties and Liabilities The Independent Cntractr understands that he r she is respnsible t pay, accrding t law, the Independent Cntractr's federal and state incme taxes, and that Cmpany is nt withhlding r paying any prtin f Independent Cntractr's taxes. If the Independent Cntractr is nt a crpratin, the Independent Cntractr further understands that the Independent Cntractr may be liable fr self-emplyment (Scial Security) tax, t be paid by the Independent Cntractr accrding t law. Respnsibility fr Wrkers' Cmpensatin N wrkers' cmpensatin insurance shall be btained by Cmpany cvering the Independent Cntractr r emplyees f the Independent Cntractr. The Independent Cntractr shall cmply with the wrkers' cmpensatin law cncerning the Independent Cntractr and the emplyees f the Independent Cntractr. Terminatin f Agreement This Agreement may be terminated at any time by Cmpany r the Independent Cntractr, by written ntice t the ther party. Ntice shall be deemed t have been sufficiently given either when served persnally r when sent by first-class mail addressed t the parties at the addresses set frth in this Agreement. Cmpany shall nt be liable fr, nr shall the Independent Cntractr be liable t perfrm, any services r expenses incurred after the receipt f ntice f terminatin Independent Cntractr Status The Independent Cntractr expressly represents and warrants t Cmpany that (1) he r she is nt and shall nt be cnstrued t be an emplyee f the cmpany and that his r her 9

10 status shall be that f an independent cntractr slely respnsible fr his r her actins and inactins; (2) the Independent Cntractr shall act slely as an Independent Cntractr, nt as an emplyee r agent f Cmpany; and (3) the Independent Cntractr is nt authrized t enter int cntracts r agreements n behalf f Cmpany r t therwise create bligatins f Cmpany t third parties. Assignability This Agreement shall nt be transferred r assigned, in whle r in part, by the Independent Cntractr withut the prir written cnsent f Cmpany. Chice f Law Any dispute under this Agreement, r related t this Agreement, shall be decided in accrdance with the laws f the state f Utah. Agreement This Agreement supersedes all prir ral r written agreements, if any, between the parties and cnstitutes the entire agreement between the parties. The Agreement cannt be changed r mdified rally. This Agreement may be supplemented, amended, r revised nly in writing by agreement f the parties. Cnfidential Matters and Prprietary Infrmatin The Independent Cntractr recgnizes that during the curse f cntract perfrmance he r she may acquire knwledge r cnfidential business infrmatin r trade secrets. The Independent Cntractr agrees t keep all cnfidential infrmatin in a secure place and further agrees nt t publish, cmmunicate, divulge, use, r disclse, directly r indirectly, fr his r her wn benefit r fr the benefit f anther, either during r after cntract perfrmance, any cnfidential business infrmatin r trade secrets. Upn terminatin r expiratin f this Agreement, Independent Cntractr shall deliver all recrds, data, infrmatin, and ther cmputer media r dcuments prduced r acquired during the perfrmance f this Agreement and all cpies theref t Cmpany. Such material shall remain the prperty f Cmpany. This bligatin f cnfidence shall nt apply with respect t infrmatin that (1) is available t the Independent Cntractr frm third parties n an unrestricted basis; r (2) is disclsed by Cmpany t thers n an unrestricted basis. Cnflicts f Interest The Independent Cntractr shall nt act as an agent fr, cnsultant t, r as an fficer, emplyee, r ther representative f any subcntractr r supplier t Cmpany, r serve in any f the freging capacities fr any f Cmpany s cmpetitrs r prspective cmpetitrs, withut giving prir written ntificatin t Cmpany. The Independent 10

11 Cntractr hereby warrants that there is n cnflict f interest between the Independent Cntractr's ther emplyment, if any, r ther cntracts, if any, and the activities t be perfrmed hereunder. The Independent Cntractr shall advise Cmpany if a cnflict f interest arises in the future. Inventins, Patents, Trademarks The terms "wrk," "trademark," and "inventin" include anything created fr Cmpany by the Independent Cntractr, whether alne r with thers, and whether thse thers be independent cntractrs, emplyees, r agents f Cmpany. 1. The term "wrk" means any and all writings, designs, mdels, drawings, phtgraphs, physical prperty, reprts, etc., that are prtectable under Title 17 f the U.S. Cde. 2. The term "trademark" means any name, wrd, phrase, lg, design, r ther graphic depictin generated during the perfrmance f this Agreement that is r can be used t describe either a prduct r service f Cmpany. 3. The term "inventin" means any designs, prcesses, inventins, r discveries that may be patentable r therwise prtectable under Title 35 f the U.S. Cde. Wrk Made fr Hire During the perfrmance f this agreement, the Independent Cntractr may create certain wrks fr Cmpany that may be cpyrighted under the laws f the United States. T the extent that any such wrks are created, the Independent Cntractr will be cnsidered t have created a wrk made fr hire as defined in 17 U.S.C. 101, and Cmpany shall have the sle right t the cpyright. If any wrk created by the Independent Cntractr des nt qualify as a wrk fr hire, the Independent Cntractr agrees t assign his r her right in the wrk t Cmpany, as prvided belw. Title t Wrks, Trademarks, and Inventins Prduced It is understd and agreed that the entire right, title, and interest thrughut the wrld t all wrks, trademarks, and/r inventins that are cnceived f, prepared, prcured, generated, r prduced, whether r nt reduced t practice, by the Independent Cntractr, either slely r jintly with thers during the curse f, in cnnectin with, r as related t the perfrmance f this Agreement, shall be and hereby are vested and assigned by the Independent Cntractr t Cmpany. The Independent Cntractr agrees t execute any and all dcuments prepared by Cmpany and t d all ther lawful acts as may be required by Cmpany t establish, dcument, and prtect such rights. The Independent Cntractr has acquired r shall acquire frm each f his r her emplyees, cnsultants, and subcntractrs, if any, the necessary rights t all such wrks, trademarks, and inventins prduced by such emplyees, cnsultants, and subcntractrs, within the scpe f their emplyment by the Independent Cntractr in perfrming services under this Agreement. The Independent Cntractr shall btain the cperatin 11

12 f each such emplyee t secure t Cmpany r its nminees the rights Cmpany may acquire in accrdance with the prvisins f this clause. Reprts The Independent Cntractr, when directed, shall prvide written reprts with respect t the services rendered hereunder. Security Regulatins The Independent Cntractr shall cmply with all applicable security regulatins f Cmpany. IN WITNESS WHEREOF, the parties heret have caused this Agreement t be executed as f [date]. INDEPENDENT CONTRACTOR By Print name Title (if applicable) COMPANY By Print name Title (if applicable) 12