The government is amazingly succinct in their vaguery. And of course, make sure you guess right because nothing is more expensive than paying someone as a contractor that the government declares an employee (you get to pay all their back taxes + a fine). The key: if you can control exactly what will be done, when and how it will be done, then the IRS categorizes them as an employee.
Our accountant provided us with a list of 20 questions to help measure the proper placement of an individual. We also have an independent contractor agreement which requires the person to submit proof of contractor status. As our lawyer told me: definitely not a get-out-of-jail-free-card but certainly shows good will on our part. I am going to list both the questions and the proof of contractor status (and link to our ICA agreement) below for those of you who are working through the same issues.
20 Questions we use to help determine a person’s status
The answers do not all need to be yes or no. It is a question of whether or not you have a strong case. If you are in doubt, I suggest you make them an employee.
- Instructions
An employee must comply with instructions about when, where, and how to work. Even if no instructions are given, the control factor is present if the employer has the right to control how the work results are achieved. - Training
An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services. - Integration
An employee services are usually integrated into the business operations because the services are important to the success or continuation of the business. This shows that the employee is subject to direction and control. - Services rendered personally
An Employee renders services personally. This shows that the employer is interested in the methods as well as the results. - Hiring assistants
An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire supervise and pay assistants under a contract that requires him or her to provide materials and labor and to be responsible only for the result. - Continuing relationship
An employee generally has a continuing relationship with an employer. A continuing relationship may exist even if work is performed at recurring although irregular intervals. - Set hours of work
An employee usually has set hours of work established by an employer. An independent contractor generally can set his or her own work hours. - Full-time required
An employee may be required to work or be available full-time. This indicates control by the employer. An independent contractor can work when and for whom he chooses. - Work done on premises
An employee usually works on the premise of an employer, or works on a route or at a location designated by an employer. - Order or sequence set
An employee may be required to perform services in the order or sequence set by an employer. This shows that the employee is subject to direction and control. - Reports
An employee may be required to submit reports to an employer. This shows that the employer maintains a degree of control. - Payments
An employee is paid by the hour, week, or month. An independent contractor is usually paid by the job or on a straight commission. - Expenses
An employee’s business and travel expenses are generally paid by an employer. This shows that the employee is subject to regulation and control. - Tools and material
An employee is normally furnished significant tools, materials, and other equipment by an employer - Investment
An independent contractor has a significant investment in the facilities he or she uses in performing services for someone else. - Profit or loss
An independent contractor can more a profit or suffer a loss. - Work for more than one person or firm
An independent contractor is generally free to provide his or her services to two or more unrelated persons or firms at the same time. - Offers services to vernal public
An independent contractor makes his or her services available to the general public. - Right to fire
An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract. - Documentation
Independent Contractor must complete Form W-9 or W-8 as well as the following:
Using an Independent Contractor Agreement (ICA)
Click Here to Download & View Shane & Peter, Inc.’s Independent Contractor Agreement.
Please note that this is being offered out of the goodness of our hearts. Consult with your accountant and lawyer on the right document for your needs and organization. Don’t sue us if you have problems, we are just trying to figure this out ourselves and share what we are learning.
There are a few sections that describe and focus upon the proof and warranties of the contractor’s status. Section 8 below is a bit different though and I have rarely seen its like outside our own company.
8. Documentation
Independent Contractor must complete Form W-9 or W-8 as well as the following:An independent contractor is an individual or organization that supplies services to Shane & Peter, Inc., but not exclusively for Shane & Peter, Inc.. In the U.S., an independent contractor’s services must be available or provided to the general public and physical proof must be provided to Shane & Peter, Inc..
Any one of the following is sufficient proof of independent contractor status:
a. A business office address separate from the residential address (not a PO Box #)
b. The filing of a business (Schedule C) Federal tax return that includes income from non- Shane & Peter sources. (copy required)
c. The contractor has employees and provides a copy of an employment tax return
In absence of any above proof, two or more of the following must be provided:
a. Business advertisement in the newspaper, etc.
b. Professional business card and stationery.
c. Business listing in the Yellow Pages or other business telephone directory
d. A separate business telephone or fax number or answering service.
e. A copy of an invoice to and a check or check stub from another company as compensation for the same type of service.
f. Proof of ownership of special business equipment, such as: a delivery truck; professional photography equipment; professional printing equipment; etc.
g. A special business license.
Former employees of Shane & Peter will need to provide substantial proof of independent contractor status, typically three or more of the above examples.
In addition, all independent contractors (except for foreign status individuals) are encouraged to provide a Federal Employer Identification Number (EIN) and not a social security number. An EIN can be applied for with Federal Form SS-4.
I require each and every individual to provide the information for us before they receive their first check. No proof, no money.
In the end much of this is subjective. As you can see in the quote from the IRS below, it is a question of control. And in reality control is a tough thing to measure accurately.
What the IRS has to say about this:
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.
taken from: IRS Website | Contractors Vs. Employees