When employers make the decision to utilize contingency or contract workers as part of their workforce, there are some things to consider. The greatest risk and most common problem associated with the use of contingency workers is misclassifying them as independent contractors and, thus, incurring the wrath of the IRS for failing to withhold payroll taxes. Misclassifying such individuals also could cause employers to violate federal and/or state wage and hour laws by failing to pay minimum wage or overtime. It also could cause you to violate Illinois law by failing to pay workers’ compensation and unemployment compensation premiums, as required.
Previously, the IRS used a 20-factor system to determine an individual’s status as a common-law employee. That list has been replaced with the categories-of-evidence methodology. On the whole, the categories-of-evidence are broader and less specific than the 20-factor test.
• Behavioral control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of instructions and training the business gives the worker.
• Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include the extent to which the worker has un-reimbursed business expenses, the extent of the worker’s investment, the extent to which the worker makes services available to the relevant market, how the business pays the worker, and the extent to which the worker can realize a profit or incur a loss.
• Type of relationship. Factors that show the parties’ type of relationship include written contracts describing the relationship the parties intended to create; whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, etc.; the permanency of the relationship; and the extent to which services performed by the worker are a key aspect of the regular business of the company.
Does all this still seem a bit confusing? Here’s a short test. If an independent contractor relationship doesn’t meet all of the following provisions, you probably will have it reclassified in an IRS audit.
• Payor must provide less than 60 to 70 percent of the independent contractor’s total income from this line of business.
• They have a place of business and advertise it as such in the yellow pages and/or newspapers or other means.
• They have a risk of loss (i.e., not paid by the hour).
• They provide their own tools and facilities and have a substantial investment in such.
• They were in business prior to you hiring them.
• A written agreement exists.
• 1099s were filed.