Ahlberg & Company Certified Public Accountants McLean, Virginia

Independent Contractors v. Employees

The following article may not apply to all situations. If you are in doubt about any point or need clarification of your situation, please feel free to call our office.

The purpose of this article is to provide some guidelines to follow in determining whether your "independent contractors" are actually employees. The law across the nation differs only slightly in this regard. Therefore, the following should enable you to make educated and reasonable determinations.

Independent Contractors v. Employees

Independent contractors are often described as persons engaged in occupations that contract to perform work according to their own methods, without being subject to control of the employer except for the result. A fifty-state survey reveals that the basic tenet of an independent contractor relationship is that the contractor has an independent occupation only responsible for the finished product. Despite the facial clarity of these descriptions, it is difficult to provide a definition for independent contractor that is sufficiently specific, and at the same time, comprehensive enough to apply to all the factual situations that may arise. For this reason, it is more helpful to understand the various factors considered by the authorities in determining whether an individual is an employee or an independent contractor

Tests of Independent Contractor Relationship

There are many well-recognized factors used in determining independent contractor status. It should be kept in mind, however, that the presence of one or more of such factors is not necessarily conclusive--all of the factors must be taken into account. The factors are guides to the primary question of whether the worker is in fact independent, or subject to the control of the employer:

The extent of control which the employer may exercise over the details of the work;
Whether the person employed is engaged in a distinct occupation or business;
The kind of work to be performed, compared to whether the work is usually done under the direction of the employer or by a specialist without supervision;
The skill required for the work;
Whether the employer supplies the instruments, tools, and location for the person doing the work;
The length of time the person is employed;
The method of payment - - hourly or by the job;
Whether the work is a regular part of the employer's business;
The intent of the parties;
The opportunity for profit or loss; and
Whether the employer is in a distinct business

In determining a person's status as an employee for FICA and tax withholding purposes, the courts and the Internal Revenue Service apply the same common law factors. Of course, whether an individual is an employee or an independent contractor is crucial in determining an employer's tax reporting and withholding obligations. As a general rule, independent contractors are not within the purview of statutes governing an employer's obligation toward its employees. Thus, independent contractors are generally not included within the statutory definitions of "employees," "workmen," or other similar terms. Nor is an independent contractor an employee within the provisions of the Fair Labor Standards Act. Independent contractors are expressly excluded from the definition of "employees" used in the National Labor Relations Acts, and are generally not covered by unemployment compensation acts.

Conclusion

Guessing at the employment status of a worker is a high-risk venture. Penalties for bad guesses include but are not limited to, exposure to additional taxes, penalties and interest, additional wage and overtime obligations under the Fair Labor Standards Act, workers' compensation and unemployment liabilities and the often overlooked probability of wrongful termination suits. The guidelines set forth above should provide some insight into the most important factors to be considered in making a well-reasoned decision on how to classify workers. Ahlberg and Company provides counseling, advice and research resources for those special situations where determination of the status of a worker is required.

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