In the last few posts I’ve been discussing the factors the IRS uses to determine if a worker is a W2 employee or a 1099 contractor. If you missed them, you can find links at the bottom of this post.
The final factor the IRS looks at to determine if a worker should be classified as an employee or contractor is Type of Relationship.
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
The factors, for the type of relationship between two parties, generally fall into the categories of:
- Written contracts
- Employee benefits
- Permanency of the relationship
- Services provided as key activity of the business
Written Contracts
Although a contract may state that the worker is an employee or an independent contractor, this is not sufficient to determine the worker’s status. The IRS is not required to follow a contract stating that the worker is an independent contractor, responsible for paying his or her own self employment tax. How the parties work together determines whether the worker is an employee or an independent contractor.
Employee Benefits
Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor.
Permanency of the Relationship
If you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
Services Provided as Key Activity of the Business
If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
If after reading these guidelines you are still unsure if you should classify the worker as an employee or a contractor, err on the side of caution and hire them as an employee. The IRS is auditing businesses looking for employee mis-classifications, and the cost of paying as a contractor versus and employee can be costly. You may be liable for the tax that should have been withheld from the employees, your employer taxes, interest and penalties.
If you need assistance with payroll or 1099 processing, we are here to help. Contact us today at 310-534-5577 or [email protected].
Prior Posts:
- Employee VS Contractor Part 1 (Costs): https://affordablebookkeepingandpayroll.com/?p=1001
- Employee VS Contractor Part 2 (Determining Factors): https://affordablebookkeepingandpayroll.com/?p=1010
- Employee VS Contractor Part 3 (Behavioral Control): https://affordablebookkeepingandpayroll.com/?p=1017
- Employee VS Contractor Part 4 (Financial Control): https://affordablebookkeepingandpayroll.com/?p=1034
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