Google “Employee or Independent Contractor” and you will find page after page of data on the subject.  Let me try and boil it down for you.

Federal employment withholding taxes represent nearly 70% of all federal tax revenue to be paid to the IRS, with unreported or under reported employment taxes contributing to the overall federal tax gap. For this reason, the IRS and Department of Labor pay close attention to worker classification issues to ensure that employers are making the right determinations. In classifying a worker as an Independent Contractor instead of an Employee, among other things, employers can eliminate; the employer’s share of Social Security (FICA) and Medicare Taxes; Federal and State Unemployment Taxes (FUTA and SUTA); Workers’ Compensation Insurance Premiums; etc.

The common law test, originally developed by the IRS, uses 20 factors to evaluate the employee, independent contractor classification, including:

  • Level of instruction;
  • Degree of business integration;
  • Control of assistants;
  • Flexibility of schedule; etc.

Although the IRS has used its 20-factor test to determine the employee/independent contractor distinction, actual decisions appear to lean toward three areas: behavior, investment, and relationship.

Behavior

Does the one paying the bill control how the job is done? Does it instruct, evaluate or train for the work required?

Investment

Does the one paying for the work provide the equipment to do the job, pay for the needs of the job while it is being performed or deal with the risks of profit or loss?

Relationship

Does the one paying for the work “control” the one doing the work?  The old “is this a monogamous or an open relationship”?

Believe me, the decision of whether the relationship is one of employee/employer or contractor/client isn’t one to take lightly.  Federal penalties for worker misclassification can be severe.

  • all payments made as if they were to an independent contractor are reclassified as wages;
  • PENALTIES of up to 20% of all the wages paid, plus 100% of the FICA taxes … BOTH the employee and employer’s share;
  • criminal penalties may be imposed, including a prison sentence; and
  • the person(s) responsible for withholding payroll taxes may be held PERSONALLY LIABLE for any uncollected or unremitted tax under the Responsible Person Penalty Statute and its state counterparts.

The IRS administers tax-related violations, while the DOL enforces federal and sometimes state labor laws, typically pursuant to the Fair Labor Standards Act (FLSA).

Bottom line, get it right, or be prepared to face the consequences.