The Internal Revenue Service (IRS) carefully scrutinizes whether a worker is an independent contractor or an employee. For tax purposes, it is crucial for businesses to correctly classify their workers. Misclassification can result in significant penalties, such as back taxes, fines, and even legal action.
So how does the IRS determine if a person is an independent contractor or an employee? There are several factors the agency considers, which we will explore in this article.
Behavioral Control
Behavioral control is one of the primary factors the IRS looks at when determining whether a worker is an independent contractor or employee. This factor considers how much control the business has over the work performed by the worker. If the business controls what work the worker does, how that work is done, and provides tools, equipment, and supplies to complete the work, the worker is likely to be classified as an employee.
On the other hand, if the worker has a high level of autonomy in how they complete the work and the tools, equipment, and supplies needed to do the job are provided by the worker, they are more likely to be classified as an independent contractor.
Financial Control
The IRS also looks at the financial control factor to determine whether a worker is an independent contractor or an employee. Financial control looks at who is responsible for providing the tools, equipment, and supplies needed to complete the work. If the business provides these resources and reimburses the worker for expenses incurred while working, they are more likely to be classified as an employee.
If, on the other hand, the worker bears the expenses related to the job, such as equipment, supplies, and other employment costs, they are more likely to be classified as an independent contractor.
Relationship
The type of relationship between the worker and the business is also considered by the IRS when determining whether a worker is an independent contractor or an employee. If the worker is hired to complete a specific project or task, they are more likely to be classified as an independent contractor. If the worker is hired for an ongoing time frame and performs a job function for the business, they are more likely to be classified as an employee.
In conclusion, the IRS considers several factors when determining whether a worker is an independent contractor or an employee. By analyzing the behavioral control, financial control, and relationship between the worker and business, the IRS can determine the correct classification. Businesses must ensure the correct classification of their workers to avoid any negative consequences.