Insights: Article

Properly Classify Your Workers in 2017

By Laurie Hanson

February 09, 2017

With all the changes that occur within an organization during the course of a year, it’s important to take a step back and review policies and procedures at the beginning of the year. For example, it’s critical that an organization classify its workers properly. Are your workers employees, or independent contractors?  Let’s take a look at the rules to make sure workers are classified in accordance with IRS guidelines for the coming year.

In general, a person will qualify as an independent contractor if the employer has the right to control or direct the result of the work, but not how or what will be done to achieve the end result. Conversely, in an employer-employee relationship, the employer has the right to direct and control the work done by the employee. The following factors are important in determining worker classification.

Behavioral Control
If an organization does any of the following things, an employee-employer relationship likely exists. 

  • determines when, where, and/or how work is performed;
  • provides tools or equipment for use;
  • hires and fires those who will assist the worker;
  • determines where supplies are purchased,
  • determines who must perform specific duties,
  • dictates the order in which the work must be performed,
  • provides instruction and training, and/or
  • evaluates the worker based on how the work is performed,

As self-employed individuals, independent contractors generally provide their own training and are evaluated based on results, not on how they achieved the results.

Financial Control
An independent contractor will normally make a significant investment in the equipment used in performing work for others. However, this cannot be used as the sole indicator in determining the proper employment classification. Independent contractors are less likely to be reimbursed for their business expenses, and are generally free to advertise their services to the public to build their business. Lastly, independent contractors are less likely to be paid on a set schedule and more likely to be paid based on completion of part or all of a project.

Type of Relationship
The IRS is not required to abide by a written contract in determining worker classification. Rather, facts and circumstances determine the classification of the worker. An employee is likely to receive employee benefits, be hired for an indefinite period of time, and potentially provide services that are a key aspect of the business. An independent contractor generally provides his/her own benefits, works on specific projects, and does not lead a key aspect of the business.

Consequences of Worker Misclassification
In challenging the classification of a worker, the IRS will strive to classify the worker as an employee. If the IRS is successful in their challenge, and no reasonable basis exists to support classification by the employer as an independent contractor, the reclassification to employee status may result in employment tax liability, penalties and interest as well as penalties for failure to provide minimal essential health insurance coverage to the worker. Such taxes, penalties and interest can be significant.

Latest Insights

September 21, 2018
Article
In the wake of hurricanes, devastating results have been experienced by communities and businesses throughout the Texas Gulf Coast, Caribbean, Florida and southeastern United States. As a result of these catastrophes, businesses will turn to…
September 20, 2018
Firm News
Eide Bailly LLP announced the winners of its 2018 Nonprofit Resourcefullness Awards, recognizing creative and sustainable revenue ideas from nonprofits in Arizona, Colorado, Minnesota, North Dakota and Utah.
September 19, 2018
Article
The IRS has started sending out Letter 5699 asking businesses to verify if they should have filed Forms 1094/1095-C. These forms are required for all ALEs.
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in Pennsylvania? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into Pennsylvania tax filings.
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in Nevada? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into North Dakota tax filings. This webinar will cover registration,…
September 19, 2018
Recorded Webinar
Are you considering doing business or having employees in North Dakota? Have you had issues with your state tax filing? Join our state and local tax team for some helpful insights into North Dakota tax filings. This webinar will cover registration,…
September 18, 2018
Article
As the largest tax reform legislation in the past 30 years becomes reality, it is important to stay up-to-date on planning opportunities and how reform may impact you and your business. Our Tax Reform: Practical Insights examples aim to break down…
September 18, 2018
Tool
Get ahead of tax season with the Eide Bailly Tax Planning Guide. A supplemental strategy guide to help guide year-end and make the tax laws work for you.
September 18, 2018
Article
The SCOTUS Wayfair decision has prompted a new focus on state and local tax compliance. The decision to register, report, and comply is important.