Worker misclassification is a perennial issue for the CPA and IRS. Accountants, IRS & State audits reveal that employers are not properly classifying their workers correctly.
20-Factor Test to Determine Independent Contractor Status
Deciding whether you can treat a worker as an independent contractor, there is a 20-Factor Test to Determine Independent Contractor Status to consider.
It is critical that business owners 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.
Are you an independent contractor? The IRS has a 20-Factor Test to Determine Independent Contractor Status that determines contractor or employee status.
Usually, you are considered an independent contractor if you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations refer to IRS 20-Factor Test to Determine Independent Contractor Status.
In addition, If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the steps on the 20-Factor Test to Determine Independent Contractor Status to determine eligibility.
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.
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)