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.