EMPLOYEE VS. CONTRACTOR
A key method for determining whether a worker is an employee or an independent contractor for withholding and employment tax purposes is the 20-factor tet.
The following 20 factors were compiled from judicial decisions and IRS rulings applying the common law rule defining the existence of an employer/employee relationship. They are used to determine whether the facts and circumstances surrounding a relationship indicate that the party contracting for the services had the right, whether or not exercised, to control and direct both the result of particular services and the means by which that result was achieved. The 20 factors comprising the test are:
1. Instructions. A worker who is required to comply with another person's instructions about when, where, and how he or she works is ordinarily an employee. This control factor is present if the person for whom the services are performed has the right to require compliance with instructions.
2. Training. Training a worker by requiring an experienced employee to work with the worker, corresponding with the worker, requiring the worker to attend meetings, or using other methods, indicates that the person for whom the services are performed wants the services performed in a particular method or manner; the worker therefore is more likely viewed as an employee than an independent contractor.
3. Integration. Integration of a worker's services into business operations generally shows that the worker is subject to direction and control, which is indicative of an employee relationship. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
4. Services rendered personally. If the services must be rendered personally, presumably the person for whom the services are performed has an interest in the methods used to accomplish the work, as well as in the results.
5. Hiring, supervising, and paying assistants. If the person for whom the services are performed hires, supervises, and pays assistants, that factor generally demonstrates control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.
6. Continuing relationship. A continuing relationship between the worker and the person for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring, although irregular, intervals.
7. Set hours of work. The establishment of set hours of work by the person for whom the services are performed is a factor indicating control.
8. Full-time required. If the worker must devote full-time to the business of the person for whom the services are performed, such person has control over the amount of time the worker spends working and implicitly restricts the worker from doing other gainful work. An independent contractor, on the other hand, is free to work for whom, and when, he or she chooses.
9. Location. If the work is performed on the premises of the person for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises of the person receiving the services, such as at the worker's office, indicates some freedom from control, which is more indicative of an independent contractor. However, this fact alone does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer would generally require that employees perform such services on the employer's premises.
Control over the place of work is indicated when the person for whom the services are performed has the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required.
10. Order or sequence. If a worker must perform services in the order or sequence set by the person for whom the services are performed, that factor shows that the worker is not free to follow the worker's own pattern of work but must follow the established routines and schedules of the person for whom the services are performed.
Often, because of the nature of an occupation, the person for whom the services are performed does not set the order of the services, or sets that order infrequently. It is sufficient to show control, however, if such person retains the right to do so.
11. Oral or written reports. A requirement that the worker submit regular or written reports to the person for whom the services are performed indicates a degree of control.
12. Payment. Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
13. Expenses. If the person for whom the services are performed ordinarily pays the worker's business and/or traveling expenses, the worker is usually an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities.
14. Tools and materials. The fact that the person for whom the services are performed furnishes significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
15. Significant investment. If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the person for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship. Special scrutiny is required with respect to certain types of facilities, such as home offices.
16. Realization of profit or loss. A worker who can realize a profit or suffer a loss as a result of the worker's services is generally an independent contractor, but the worker who cannot is an employee.
For example, if the worker is subject to a real risk of economic loss due to significant investments or liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor.
The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.
17. Multiple service recipients. If a worker performs more than minimal services for multiple unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. However, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.
18. Availability of services. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship.
19. Right to discharge. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
20. Right to terminate. If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.
The information set forth herein was obtained from sources that I believe reliable, but I do not guarantee its accuracy.
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"Brian does an excellent job of personalizing his service. Whether I choose to work with him via email, phone, fax, mail or in person, Brian provides timely support based on my needs and schedule. I am sure he makes each of his customers feel like they are his most important client."
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How do I apply for an EIN?
To get an Employer Identification Number (EIN) form the IRS online you should go to www.irs.gov/businesses then click on "Employer ID Numbers" under the Topics section. An EIN is issued after the successful submission of the completed Form SS-4 online. As your CPA I may request your EIN via the internet on your behalf. A copy of Form SS-4, signed by you as the taxpayer, must be maintained in the business files I hold on your behalf.