Independent Contractor Compliance Blog

The Rules are there for everyone to see. They aren’t secret.  However, it is very common for people to misapply them and arrive at a different conclusion than the IRS. Why is that?

Before I answer that, let me list and correlate the two different approaches of explaining the IRS rules for common law.

Category One:  Right to Direct and Control the Details of How the Job is Completed

1. Who, when, and where is the job controlled?
2. Who can control the detailed results on a day-to-day basis?
3. Who controls the hours worked?
4. Who provides the tools?
5. Who provides the supplies?
6. Does the principal train the contractor/consultant?
7. May the consultant hire his/her own assistants without permission?
8. Is the consultant required to attend regular meetings?
9. Is the consultant required to submit routine reports (hours, activities, etc)?

Category Two:  Financial Control

1. Who controls the business/project’s assets?
2. Does the principal control the method of payment and the money?
3. Is the consultant reimbursed for expenses?
4. Can the consultant provide services for others at the same time (even the principle’s competition)?
5. Does the consultant have the ability to make management decisions that will affect their profit and loss for the project?

Category Three:  Relationship of the Parties

1. How do the parties perceive the relationship (intent)?
2. Does the consultant receive benefits (retirement, sick leave, profit sharing, etc)?
3. Can either party terminate the relationship, at will, with no liability incurred for doing so?
4. Is the work being performed an integral part of the business operations?
5. How long will/has the relationship (project) last(ed)?
6. If there is a written contract; what does it say about the relationship?

So there you are. Simple really, except how do you apply these questions to a specific situation?

The Devil is the Application:  It’s rarely as cut-and-dry as adding up how many factors settle on the employee side and the IC side of the equation, with the most giving you the answer.  There isn’t enough time and space to explain how to properly use them in every situation possible. Each of these factors are weighed and applied differently. In some cases “who supplies the equipment” is heavily weighted and in others it has almost no weight at all.  It will be different for each type of job and situation. It takes not only knowledge, but experience to apply these factors with the proper weighting and judgment.

Rely on an Expert: That’s why you should go to an expert to help you. You utilize experts in others fields, specialists who will take a complicated task and perform it effectively and efficiently for you. Applying either the federal or state common law rules of employee and Independent Contractor law is not different from any other high-end technical service. Using an expert will save you time and money in the long term.

Post Script: I didn’t include the IRS Safe Harbor Section 530 and how it can affect this issue-that’s a whole new ball game that I’ll save for another time.