Government agencies prefer employees instead of independent contractors. It is easier and far more reliable to collect payroll taxes and income tax withholdings from employers than from independent contractors. Thus, these government agencies have stepped up their audit activities looking for companies that misclassify employees as independent contractors. In 2007, New Jersey became the first state to fully criminalize employee classification violations. Under this law, all payments for services are considered to be for an employee and the burden of proof is on the hiring manager to establish that the worker qualifies as an independent contractor. IEEE asks that its staff and volunteer Treasurers become familiar with this issue to avoid any serious consequences.
An independent contractor is an individual or entity that is not affiliated with the IEEE and provides short-term or project-based professional or specialized advice or services under a written independent contractor agreement. Independent contractors are in business for themselves and receive a fixed amount for services rendered. This fixed amount includes all expenses associated with providing the service as applicable and agreed upon, i.e. travel, lodging, meals, mileage, resources/materials, copy fees, etc.
Section 31.3121(d)-1(c)(2) of the IRS regulations provides that generally the relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services not only as to the results to be accomplished by the work but also as to the details and means by which the result is accomplished.
The IRS test for determining worker's employment status is called the common law test. It is the measure the IRS uses to determine whether the hiring firm has the right to control a worker on the job. The IRS has instructed its auditors to look at three areas for this determination. These are:
2. The financial control factors are those which show whether a hiring firm has a right to control a worker's financial life. A worker will more likely be considered an independent contractor if he or she: 1) has a significant investment in equipment and facilities; 2) pays business or travel expenses himself or herself; 3) makes his or her services available to the public; 4) is paid by the job; and 5) has opportunity for profit or loss (e.g. there is no opportunity for profit or loss if the worker is paid by the hour or is reimbursed for all expenses).
3. The relationship of the worker and hiring firm factors are those which show whether the hiring firm and the worker believe he or she is an independent contractor or an employee. A worker will more likely be considered an independent contractor if he or she: 1) is not provided with employee type benefits; 2) has signed an Independent Contractor Agreement with the hiring firm; 3) is hired with the expectation that the working relationship will not continue indefinitely (e.g. Independent Contractor Agreement has a definite end date); and 4) performs services that are not a part of the hiring firm's regular business activities.
Complete the following steps in the order listed:
Please contact the IEEE Tax Department with any questions or comments regarding independent contractors: firstname.lastname@example.org.