Over the past few years, the IRS has increased enforcement against employers that misclassify employees as independent contractors, leading to fines and penalties for companies that fail to make the important distinction between the two.
There are three characteristics the IRS uses to distinguish between an employee and an independent contractor:
- Behavioral control – the amount of control a business has over how the work is done.
- Financial control – the amount of control a business has over the financial and business aspects of a worker’s job.
- Relationship type – how the business and the worker perceive the working relationship.
The Small Business Administration notes that a worker will typically be regarded as an employee under the following circumstances:
- They have specific duties that are determined by the company
- They perform work that is controlled by the company
- They receive training provided by the company for the work they perform
- They only work for one company
A worker will typically be regarded as an independent contractor if they:
- Have a separate business name
- Submit invoices for their work
- Use their own equipment in the performance of their work
- Determine their own working hours
- Have separate financial accounts and business records
- Have other people working for them
- Perform only temporary work
- Have a written contract with the employer
Companies that misclassify workers are subject to stiff financial penalties, including fines and interest. In addition, if the misclassification is willful, harsher penalties can apply.
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