Recently, the Internal Revenue Service has stepped up its scrutiny of the age-old issue as to the status of workers being used on construction contracts. Employees or independent contractors?
Here is the tactic being used by the IRS to determine if there is an issue. The IRS cross-references the 1099s issued by a business to their so called independent contractors. In cases where the person that was issued the 1099 has all or substantially all of their income from that one contractor, they are then looking into those situations on a more detailed basis. It is therefore time to revisit this situation
Some of the benefits to claiming someone as an independent contractor versus an employee are: 1) no need for fringe benefits; 2) no payroll taxes; and 3) no record-keeping of employee information. On the other side of that coin are the potential problems that could arise from the IRS claiming a person as an employee: 1) overtime pay would be charged; 2) retirement benefits alleged; 3) medical coverage along with other fringe benefits would be assessed; and 4) unemployment compensation would be required, to name a few.
There are 20 factors used in determining whether a worker is an employee or an independent contractor. They are as follows:
Training provided by the company.
Integration of the worker’s services into the company.
Compliance with instructions – when, where, and how.
Personal provisions of the services.
Hiring, supervising, and paying assistants.
A continuing relationship.
Set hours of work.
Exclusive full time work for one company.
Work performed on company premise.
The company controls the work flow.
The company requires regular reports.
Payment made hourly, weekly, or monthly for services performed.
Expenses are reimbursed.
Tools and materials are supplied.
The worker bares little risk.
The worker performs services for more then one company.
The worker’s services are made available to the public.
The company has power to fire the worker.
The worker will owe termination damages if work is not completed.
As one can see, these rules are extensive, but the business owner must understand that these rules are only guidelines used by the IRS, and each case is different. Businesses should make sure they are familiar with this issue and the above factors and attempt to follow the letter of the law. Do not put too much emphasis on the factors in your favor, and do not brush off those that are not. Also, do not rely on so-called industry practices, and be realistic when evaluating each case separately
Should you feel your business may have a problem relative to this issue, we recommend you become familiar with Section 530(d) of the Revenue Act of 1978, not a part of the IRC, but enacted by Congress in the 1970s and Rev ruling 87-41.
This issue is one that can cost a business a substantial amount of money and almost always occurs after all revenue is collected relative to the work performed, leaving the business with no method of recouping those costs. Make sure this issue of independent contracting is handled properly within your business.