Know the Rules on Independent
Contractors
Outsourcing work to independent contractors is probably more common in
construction than in many other industries. After all, bringing in qualified
independent contractors to handle various aspects of a project with tight
deadlines makes perfect sense. It also makes financial sense.
Know the Ground Rules
However, don't let the financial advantages of hiring independent
contractors blind you to the need to consistently treat them as independent
contractors. You must familiarize yourself with the factors that the IRS
uses to help differentiate an independent contractor from an employee.
If you misclassify an employee as an independent contractor, the IRS will
seek unpaid payroll taxes--and possibly penalties and interest on that
amount--from your firm. And you could be forced to provide the worker with
the same benefits you provide for your employees.
What the IRS Looks At
The IRS reviews a wide range of common law factors in determining whether a
worker is an employee or an independent contractor. Depending on the
circumstances, these factors include:
Behavioral control. Independent contractors are not under the direct supervision and control of company personnel and do not receive detailed instructions about how work is to be performed. All of the following are examples of such instructions:
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When and where to do the work
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What tools or equipment to use (Independent contractors furnish their own tools and equipment.)
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What workers to hire to assist with the work
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Where to purchase supplies and services
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What work must be performed by a specified individual
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What order or sequence to follow
Even if no instructions are
given, behavioral control may exist if the business has the right to control
how the work is performed. In addition, the issue of training is weighed by
the IRS. Independent contractors do not receive company-provided training
about procedures to be followed and methods to be used in performing a task.
Financial control. The facts that determine whether a business has
the right to control the business aspects of a worker’s job include:
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The extent to which the worker has unreimbursed business expenses (Independent contractors typically pay their own business and travel expenses.)
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The extent of the worker’s investment
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The extent to which the worker makes services available to others
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How the business pays the worker (Independent contractors are usually paid separately by project.)
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The extent to which the worker has the opportunity to realize a profit or loss (Independent contractors may realize a profit or suffer a loss while performing contracted services.)
Relationship of the parties. A review of certain factors can illustrate the nature of the relationship:
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Written contracts that describe the relationship the parties intend to create
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Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
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The permanency of the relationship (The independent contractor’s services are typically for separate and distinct projects; however, employees also may be hired on a seasonal or project basis.)
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The extent to which services performed by the worker is a key aspect of the company’s regular business
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If a worker is hired with the expectation that the relationship is for more than a specific period or project, then the IRS will consider this factor as evidence of an employer-employee relationship.
If
you need help in ensuring that your firm correctly classifies independent
contractors, please
contact us.
Work-In-Process is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed,
please contact
Ken
Hedlund,
Jay Feller,
Steve George,
Chris
Mayfield or
Rebecca Ogle
of our
Construction & A/E Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.IndianaConstructionCPAs.com
