The last few posts discussed the cost of hiring an employee versus a contractor and I started to discuss how the IRS determines if a worker is an employee or a contractor. If you’d like to read the previous posts, see https://affordablebookkeepingandpayroll.com/?p=1001 and https://affordablebookkeepingandpayroll.com/?p=1017. Below is information of the financial control factors the IRS uses to make its determination.
Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.
The financial control factors fall into the categories of:
- Significant investment
- Unreimbursed expenses
- Opportunity for profit or loss
- Services available to the market
- Method of payment
Significant investment
An independent contractor often has a significant investment in the equipment he or she uses in working for someone else. However, in many occupations, such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees. There are no precise dollar limits that must be met in order to have a significant investment. Furthermore, a significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.
Unreimbursed expenses
Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their business.
Opportunity for profit or loss
The opportunity to make a profit or loss is another important factor. If a worker has a significant investment in the tools and equipment used and if the worker has unreimbursed expenses, the worker has a greater opportunity to lose money (i.e., their expenses will exceed their income from the work). Having the possibility of incurring a loss indicates that the worker is an independent contractor.
Services available to the market
An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
Method of payment
An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
If the worker uses your equipment, gets a regular paycheck (especially if using a timesheet or clock to track time) and doesn’t have the opportunity to grow their income by working with other businesses, they are most likely an employee and should be treated as such.
If you have questions, feel free to contact our office at 310-534-5577 or [email protected].
Candy
