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Twenty Factors
Keeping It Legal


In an effort to contain costs and maximize productivity, many business owners have traditionally found it extremely worthwhile to hire independent contractors instead of employees. Among the many advantages: not having to worry about withholding for taxes, worker's compensation payments, Social Security, Medicare, and unemployment compensation; enjoying the benefits of reduced taxes; and not having to pay fringe benefits. Furthermore, using independent contractors allows an employer to have additional personnel when needed, without having to pay for extra full-time employees.

Unfortunately, merely calling a worker an independent contractor does not make it so. In the past few years, the Internal Revenue Service and various state agencies have launched campaigns to locate and reclassify workers whom employers have incorrectly labeled independent contractors. Their goal is to raise more taxes as a result of the reclassification, both by the taxes and the penalties.

Government agents routinely go into companies and audit them to determine whether their current classifications as independent contractor are appropriate and whether proper filings have been made. In cases where infractions are discovered, employers often end up paying hefty fees and penalties. It is, therefore, to your benefit as a business owner to know these IRS rules.

It is often difficult to tell whether a worker is an independent contractor or an employee. At first blush, the issue is one of control, that is, whether the worker is subject to the control of the employer. The more control an employer exerts over a worker, the more likely an employer/ employee, and not a contractor/subcontractor, relationship will be found.

Twenty Factors

The IRS relies on the following twenty factors to determine whether someone is an independent contractor or an employee. No one factor is determinative. What matters is how much cumulative control the employer exerts over the worker.

  • Instruction, training, integration, services personally rendered.
  • Hiring/firing and payment. Continuing relationship. Set hours of work. Full-time required.
  • Doing work on employer's premises. Order per sequence set. Oral or written reports.
  • Payment by hour, week or month. Payment of business and/or travel expenses .
  • Furnishing of tools and materials. Significant investment. Realization of profit or loss.
  • Working for more than one employer. Making services available to the public.
  • Right to discharge the worker. Right of worker to terminate services.

    Whether you have mislabeled a worker intentionally or unintentionally, you will find that the penalties associated with reclassification can be catastrophic. In addition to having to pay back taxes, penalties and interest may also be assessed.

    Keeping It legal

    There are precautions you can take to avoid having your independent contractors incorrectly labeled by the government as employees. It is best to have a written contract that is signed by both parties. This agreement should clearly state that:

  • The employer does not have the right to control the methods by which the worker will accomplish the work.
  • It is the worker's obligation to pay his or her own income and self-employment taxes.
  • The worker will provide his or her own liability, worker's compensation, health and disability insurance.
  • The worker will receive a 1099-MISC at the end of the year in order to report any money paid.
  • If any additional workers are needed for the project, it will be the worker's responsibility to hire and pay for the additional help.
  • The worker will provide his or her own tools, equipment, supplies, etc.
  • The worker has the right to accept other employment and does not work for the employer's company exclusively.
  • The worker will be paid for the work done, and not according to the amount of time that is spent on the project.
  • Any costs of meals, transportation and clothing are the sole responsibility of the worker.
  • The worker cannot be "laid-off" and can be terminated only for not fulfilling the contract.
  • The worker's hours will not be set by the company. Rather, starting and completion dates for the project will be set.
  • The worker will not have an office space on the employer's premises for use on a regular basis.
  • The worker will not be given other tasks by the employer to fill in time. If there is additional work, it will be set up as a separate project with separate terms and separate compensation.

    In addition, if the worker has his or her own corporation with its own stationery, business cards, and advertising materials that are used for other jobs, chances are that he or she will be more likely classified as an independent contractor. (Please note that having a separate corporation may not guarantee that a consultant will be considered an independent contractor. If in doubt, please consult an attorney!)

    Working with independent contractors can be a smart, cost-effective means of getting the work out for many small businesses. However, the hiring issues involved are complicated. Each situation must therefore be viewed as unique and dealt with accordingly. So, if you have any questions concerning the status of a worker, you should be prepared to discuss them with your attorney or accountant.


    This pamphlet is for informational purposes only. You should consult with an attorney regarding your specific situation.
    © Copyright 2012 Shimberg and Crohn, P.C.  


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