IRS & Laws: Summary of 20 Point Check List For Independent Contractor and Employee Status

Small businessman Ken Lange who has written a book entitled, "Independent Contractors Instead of Employees" available from Success Publications. From that book, below is a summary of the 20-point checklist:

1. A worker who is required to comply with instructions about when, where or how he or she is to work, is ordinarily an employee. (The only way a business owner can stipulate is by mutual contract agreement.)

2. If a worker is trained by an experienced employee, required to attend training or meetings, or is trained by other methods under the direction of the company, the training indicates that the company wants the services performed in a particular manner, This factor tends to indicate an employee relationship. (A business can't provide training. Independent contractors have to get it on their own, away from the company overseers.)

3. If the success and continuation of the business depends on the worker's services, and the worker coordinates work with other workers, this is a factor indicating employee status. (Independent contractors coordinate their work at their pace, not that of the business. Business must accept and realize this when using independent contractors.)

4. If the services must be rendered personally by that worker, the IRS presumes that the company is interested in not only the result, but also the worker and the methods used, and therefore the worker may be classified as an employee. (Independent contractors can sub-contract any job that the business contracts them to do. The business has nothing to say about how it's done, only that the results are what was contractually agreed.)

5. If the worker has the responsibility to hire, supervise and pay assistants at the direction of the company, these factors tend to indicate that the worker may be an employee. If the worker hires, supervise or pays his own assistants without any reporting mechanism to the company, then this factor would indicate an independent contractor relationship. (Independent contractors hire and fire their own employees.)

6. A continuing relationship between the worker and the person receiving the services is a factor indicating that an employee relationship exists. In contrast, a single parenthetic relationship indicates independent contractor status.(Business owners and independent contractors should keep each other at "arm's length.")

7. If set hours are established, this is a factor indicating control and an employee relationship. (If independent contractors are used in a place of business, business hours can't be stipulated anywhere, unless all independent contractors' hours are stipulated. Otherwise business is exercising control, thus an employee/employer relationship can be determined.

8. If a worker must devote his full time to the business, then his or her employer has control over the amount of time that the worker has available to spend time for others, and an employment relationship is indicated. (An independent contractor must have the option of working in other businesses—not one business exclusively— unless mutually and contractually agreed upon.)

9. Performing work on the employer's premises and using the employer's office, desk, telephone, etc. suggests that the employer has the physical ability to direct and supervise the performance of those services, which indicates employee status. (Just the "suggestion" of supervisory control can cause an employer/employee determination. It's best independent contractors have their own phones, desks, etc.)

10. If a worker must perform services in a certain order or sequence established by the company, it indicates that the worker is not free to follow his or her own pattern of work, but is required to follow the established routines and schedules of an employer. (Pretty clear. Independent contractors schedule their own time to complete their contractual agreements.)

11. A requirement to submit regular oral or written reports often shows that the work is compelled to account for his or her actions and is, therefore, subject to an employer's control. (Business owners cannot in fact require independent contractors to do any work/services outside of their contractual agreements.)

12. Payment by the hour,, day, week or month generally indicates an employee relationship. Payment by the job, or for a fixed fee shows independent contractor status. (Pretty self-explanatory.)

13. If the company pays the worker's business and travel expenses, this shows employee status. (If a company should pay an independent contractor's expenses, and the independent contractor doesn't repay company for such expenses, independent contractors are bound to declare such expenses as income. As such, these expenses are taxable to the independent contractor.)

14. If the company provides tools and materials, this tends to show an employer/employee relationship. (Independent contractors provide everything, tools, supplies, materials, everything...)

15. If the work has a real and significant investment in tools and equipment required to perform their services, this factor indicates an independent contractor relationship. (Independent contractors should keep all receipts for anything bought and used in their work as proof of their investment—not to mention possible tax deduction.)

16. If the worker can realize a profit or loss as a result of his or her services, that worker is generally (but not always) an independent contractor. (A business pays a straight commission to an auto mechanic, for example. Worker has bought all necessary tools and has a slow month—loses money. This worker is an employee even though the "employer" thought he or she was an independent contractor. The worker— to be a true independent contractor—must be leasing a space from the owner, should have a contract, and give the owner a "1099) at year's end.

17. Generally, a worker who works for several persons or firms at the same time is an independent contractor, as this worker is free from control by any one of the firms. (It may be a good idea for your independent contractors to have at least one other place where they conduct business.)

18. A person who makes his or her services available to the general public is usually determined to be an independent contractor. (A worker doesn't have to be contractually involved with a business, as long as their services are available to the public—and they advertise them as such.)

19. A company having the right to discharge the worker, is ordinarily an employer. However, if the company cannot fire the worker—so long as he or she produces a result that meets specifications—the worker may be an independent contractor. (Key word here is "may." Be sure you follow IRS regulations to the letter, and see a qualified CPA.)

20. An employee generally has the right to terminate his or her relationship with the employer at any time without liability. An independent contractor, however, usually agrees to complete a specific job and is responsible for its satisfactory completion, or legally obligated to make good his or her contractual agreement. (Independent contractors are independent businesspersons, and as such are bound to fulfill their contractual obligations— otherwise they can be sued for damages like any business!)