IRS On Employee Verses Independent Contractor Distinction

The Internal Revenue Service (IRS) recently did a presentation on the proper classification of workers, specifically on the employee versus the independent contractor distinction, according to the Howe &
Hutton Report. The IRS noted the old 20-factor test set forth in IRS Revenue Ruling 87-4 is still valid, but said the factors are more conveniently included in three evidentiary categories: First, behavioral control; second, financial control; and third, the relationship of the parties.

Behavioral control basically includes control of the work to be done, how, when, where, by whom, and any instruction or training. Financial control includes investment by the employer or worker, payment of expenses, and the ability to make a profit or incur a loss. The relationship of the parties includes such factors as permanency of the relationship of the parties, provision of employee-type benefits such as sick days, pension or insurance, and whether the worker’s performance is integral to the employer’s business.

It’s always instructive to review the factors considered by the IRS, and used by the U.S. Department of Labor and states’ department of labor representatives when determining whether workers are properly classified, the article said. Misclassification can result in serious penalties and fines, including recovery of income tax, Social Security and Medicare taxes that should have been withheld and were not. (Most misclassification claims come from disgruntled workers to state or federal authorities.