The Internal Revenue Service (“IRS”) recently ruled that a person, providing services to the same company, may be classified as an employee, independent contractor or in some situations, both. The unusual pronouncement by the IRS came in the context of a professional consultant.
The IRS looks to the common law rules to determine whether an employer-employee relationship exists. This is a fact question after considering all of the facts and circumstances in a particular case. If the individual may be directed or controlled, regardless of whether or not such direction or control actually occurs, an employer-employee relationship will be deemed to exist. Direction and control is not only as to result, but also as to the details and means by which that result is to be accomplished.
In making that determination, the IRS will examine the relationship between the worker and the entity, looking into three (3) broad categories of evidence: behavioral controls, financial controls and the relationship with the parties.
Behavioral controls are evidenced by facts that illustrate that the business has a right to direct or control how the worker performs the specific tasks for which the individual is retained. Some facts include provision of training, the issuance of instruction or the completion of an evaluation.
Financial controls are determined by examining whether the company has a right to direct or control the financial aspects of the individual’s activities. These factors include the method of payment, the individual’s opportunity for profit or loss, and whether an individual has made a significant investment, incurred unreimbursed expenses or otherwise makes services available to the relevant market.
Finally, the relationship of the parties is generally evidenced by their agreements and actions with each other, including facts that show not only how they perceive their own relationship, but also how they represent the relationship to others. The existence of written contracts, the provision, or lack, of employee benefits, the right to terminate the relationship, the permanency of the relationship and whether the services performed are a part of the business’ regular business activities.
The IRS states that where an individual provides services in two separate roles to the same business, the IRS examines separately the relationship between the worker and the business for each performance of services. If there is uncertainty whether or not an individual should be classified as an employee, and thus have their compensation subject to FICA and income tax withholding requirements, or an independent contractor and avoid such obligations, a business may file IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” in order to request an IRS determination.
As a caveat, it should be noted that the IRS, together with the Department of Labor, has beefed up their efforts to fight employee misclassification. In fact, $14 Million has been added to next year’s (FY 2014) budget for that very purpose.
If, on the other hand, you believe you have mischaracterized an individual as an independent contractor instead as an employee, you may be able to avail yourself of the IRS’ Voluntary Classification Settlement Program (“VCSP”).