Determining whether a worker is an employee or an independent contractor (IC) is a critical issue for businesses, and the IRS has been cracking down on misclassification. Here are seven major questions the IRS considers when making this distinction:
1. Control Over Work – Did the worker have to comply with your instructions on when, where, and how to work? More control suggests an employee relationship.
2. Work Location – Did the worker perform duties at your business location (employee) or in an independently rented space (contractor)?
3. Financial Risk – Could the worker make a profit or loss based on their services? Independent contractors take on financial risks, while employees do not.
4. Termination Rules – Could the worker be dismissed without cause? Employees typically can be let go at will, while contractors often have contract terms.
5. Ongoing Relationship – Did the worker have a long-term relationship with your company? A lasting relationship may indicate an employee.
6. Availability to Other Clients – Did the individual provide services to other businesses? Contractors typically work with multiple clients.
7. Training & Supervision – Was the worker trained by your company to perform work in a specific manner? Training and oversight suggest an employee.
Misclassifying workers can lead to IRS penalties, back taxes, and fines, so it’s important to get it right! If you're unsure about worker classification, Saul Bookkeeping can help ensure you stay compliant. Reach out to us for a review of your business practices.
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