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Independent Contractor Guidelines 

To cope with the economic downturn many companies are looking for ways to cut costs. One way some employers use to do this is to hire independent contractors instead of regular employees. However, this cannot be done without fully understanding how the IRS looks at independent contractors.  Below you will find some general guidelines to understanding what determines someone to be a true independent contractor. 

People such as lawyers, contractors and subcontractors who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case. The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. 

Common Law RulesFacts 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 workerâ??s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) 

Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no â??magicâ? or set number of factors that â??makesâ? the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.Typical questions in making a determination could be:

• If the worker can be discharged at anytime and can choose whether or not to come to work without fear of losing employment
• If the worker controls the hours of employment thus indicating they are acting as an independent contractor
• Whether the work is temporary or permanent
• What is the degree of control over work and who exercises that control?
• What is each party’s level of loss in the relationship?
• Who has paid for materials, tools, supplies and/or equipment?
• What type of skill is required for work?
• Is there a degree of permanence?
• Is the worker an integral part of the business?
• Is the worker allowed to work for other employers?

If you are considering hiring independent contractors or already have some on board and would like an independent review, Human Resources 4U can assist you in making the proper determinations.

Human Resources 4U is a full service Human Resources consulting company specializing in small and midsize businesses.  Note: This article is presented with the understanding that we are not engaged in rendering legal advice.  If legal advice is required, the services of a competent attorney should be sought.