You need some help in conducting your home-based business. You’d like just to have someone come for a few hours, pay for the time and be done with it. Can it ever be that simple?

You are helping out one of your most valued clients and putting in lots of hours at his/her office. You’d like just to be paid for your time. Can it be that simple?

In a nutshell, no! But treating a worker as an independent contractor rather than as an employee would simplify the arrangement greatly.

Independent Contractor

If your worker earns more than $600 and qualifies as a genuine independent contractor you prepare a tax form at the end of the year called the IRS Form 1099 Misc., stating the amount you paid the worker. Preparing and sending that form is essentially all that is necessary.

Employee

But if your worker is really an employee, you have to deduct and withhold federal income taxes, pay social security taxes, unemployment taxes and perhaps fringe benefits. The administrative and tax burden tempts many small business persons to call a worker an independent contractor, whether the worker qualifies as one or not.

The IRS strongly disfavors independent contractors. It claims that more than $1.6 billion in uncollected taxes is lost to it each year. It has therefore imposed strict regulations that can cost the employer stiff penalties, fines, back taxes and interest charges.

Determining Appropriate Classification

How do you determine whether a person can be classified as an independent contractor? There is no bright line test, but rather a set of factors that the IRS uses to determine the worker’s classification. No one factor is determinative, rather the relationship is looked at as a whole.

Control

One of the main factors is that of control, that is, how much control you have over your worker. The general rule is that if you control or have the right to control only the results of the work and not the means or methods of accomplishing the work, then the worker might be considered an independent contractor. You can set the standards, but you may not control how the work is done as well.

If you require the worker to work on your premises, set a work schedule, have the worker use your tools and have the right to fire, these are all indications of an employer/employee relationship. On the other hand, if a worker comes to you, picks up a project, goes off, completes the project without your oversight, and returns it back to you, there is an indication that the person would be considered an independent contractor.

Permanency of Relationship

Another of the main factors is the permanency of the relationship. The worker who is hired for an indefinite period of time might more likely be considered an employee. If the worker is engaged for a specific project with a distinct beginning and end, there is more indication of an independent contractor, especially if the workers hire him/herself out to others for similar services and has different clients.

Role of Services Rendered

Yet another factor is the extent to which the services rendered are integral to your business. If the worker is hired to support or do similar work to what you do, it is an indication of employment. If the person comes to set up your office or rewire your house, he/she would be considered to be an independent contractor, especially if the services are offered to the general public.

Opportunity For Loss

And yet another significant factor is the opportunity for loss. If the worker bears the risk of using his own initiative, judgment and foresight, and has expenses that are reimbursable only by special arrangement, there is a better indication of the independent contractor designation. If the worker has no chance to lose money, then there is every chance that the worker may be deemed an employee.

Consider now the 20 common law factors used by the IRS to determine a worker’s classification.

20 Common Law Factors Used by the IRS To Determine a Worker’s Classification

Workers are generally considered employees if they:

1. Must comply with employers’ instructions about their work.

2. Receive training from or at the direction of the employer.

3. Provide services that are integrated into the business.

4. Provide services that must be rendered personally.

5. Hire, supervise and pay assistants for the employee.

6. Have an on-going working relationship with the employer.

7. Must follow set hours of work.

8. Work full-time for an employer.

9. Do their work on the employers’ premises.

10. Must do their work in a sequence set by the employer.

11. Must submit regular reports to the employer.

12. Receive payments of regular amounts at set intervals.

13. Receive payments for business and/or travel expenses.

14. Rely on the employer to furnish tools and materials.

15. Lack a major investment in facilities used to perform the service.

16. Cannot make a profit or suffer a loss from their services.

17. Work for one employer at a time.

18. Do not offer their services to the general public.

19. Can be fired by the employer.

20. May quit work at any time without incurring liability.