It costs much less to hire someone to work as an independent contractor rather than as an employee. It is for this reason businesses choose to do that even when the rules state otherwise. Both Federal and State Governments are cracking down on worker misclassification, and the penalties for doing this can be severe to the employer. Withholding taxes from employees represent nearly seventy percent of Federal tax revenue to the IRS, so this is a big issue to them.
In the past the IRS has relied on what is called the “20 factor test” to determine the relationship between a worker and the employer. While this test may still be used, more recently the IRS has condensed that into three broad categories:
Behavioral control- Whether the company controls or has the right to control what the worker does and how the job is done. Does the employer provide training and instruction? That could indicate that the worker is to be classified as an employee.
Financial control- Who controls the economics of the worker’s job. Do they work for multiple companies and use their own tools? If the worker does that might indicate independent contractor status.
Relationship control- How the parties perceive each other. Is the agreement between the two parties indefinite? That would likely be determined as an employer/employee relationship.
A worker classification audit more often than not results in an employee determination, so it is important for a business to be proactive in this area by properly categorizing its workers.