Employee or independent contractor?
Ronald LMoser CPP, payroll/employee benefits consultant for TaxingMatters , discusses the common law test in the USA
M aking the determination of whether a worker is an employee or independent contractor can be a difficult decision. While there is no uniform definition of an employee under all payroll laws, we do have some guidance in the form of the common law test, the reasonable basis test, and factors considered by the US Department of Labor (DOL). This article addresses the common law test, which the Internal Revenue Service (IRS) uses to make an employment status determination. The key to the common law test is the right to control. The control factors comprise: behavioural control, financial control, and the type of relationship between the worker and the business. Behavioural control The main factors of behavioral control are the right to direct and control the details and means by which the worker performs the work. It looks at the level of instructions the business gives the worker: how much instruction is needed to do the job; when to do the job; and where and how to work to do the job. Keep in mind that even if there is no instruction taking place, the mere fact that the employer has the right to control through instruction may be enough evidence to show that the worker is an employee. Another factor is the level of training provided to the worker by the employer. Consider how often training is provided or if it is ongoing training regarding procedures to be followed and any methods that must be used to perform or complete the work. Independent ...no uniform definition of an employee under all payroll laws...
contractors usually will rely on their own methods.
pay, or a retirement plan? The term of the relationship also will be a factor. If the expectation is that the worker will continue indefinitely, rather than for a specific period of time or for a specific project, then generally this will be looked upon as evidence of an employment relationship. If the worker’s services are a key aspect of the business’s regular operations, the IRS generally decides that it is likely that the business will have the right to direct and control the worker’s activities. The IRS has identified some factors that it considers not important. They include part-time or full-time work, the location of the work, and hours of work. IRS Form SS-8 – Determination of worker status for purposes of federal employment taxes and income tax withholding – can be helpful in gaining an understanding of what the IRS looks at in making its determinations during an audit. n
Financial control Financial control considers whether the business has the right to direct and control the economic aspects of the worker’s completion of the job. Will the worker be reimbursed for business expenses? Does the worker have a substantial investment in the work? Does the worker provide their services to the general public? How is the worker paid? Could the worker realise a profit or loss? Type of relationship Factors that will be considered for the type of relationship will include asking if there is a written contract. Note that a contract by itself does not make a worker an independent contractor. Is the worker provided with any benefits, such as paid vacations, health and life insurance, sick
This article was published in the September 2019 issue of the American Payroll Association’s PAYTECH magazine. Ronald L Moser CPP is a member of the APA’s Ambassador programme, a CHAMPS mentor, part of the Government Relations Task Force (GRTF) IRS Issues and Payroll Cards Subcommittees, the National Speakers Bureau, the Strategic Payroll Leadership Task Force (SPLTF) Government/Public Sector Best Practices Subcommittee, and a founding member of the SPLTF K-12 Educational Organizations Subcommittee. The American Payroll Association (APA), www.americanpayroll.org, is the US leader in payroll education, publications, and training. This nonprofit association conducts more than 300 payroll training conferences and seminars across the country each year and publishes a complete library of resource texts and newsletters. Representing more than 21,000 members, the APA is the industry’s highly respected and collective voice in Washington, DC. The Global Payroll Management Institute (GPMI), www.GPMInstitute.com, spearheads the APA’s global initiatives to provide the world with a leading community of payroll leaders, managers, practitioners, researchers, and technology experts. Subscribers connect with each other through networking discussions, collaborative opportunities, and access to education and publications dedicated to global payroll strategies, knowledge, research, employment, and training. GPMI also publishes several global payroll texts and white papers as a benefit to subscribers.
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| Professional in Payroll, Pensions and Reward |
Issue 60 | May 2020
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