Independent Contractor Compliance Blog - by Collabrus™

The Internal Revenue Service issued the 2010 standard mileage rates used to calculate the deductible costs of operating an automobile for business purposes.  Beginning on January 1, 2010, the standard business mileage rates for the use of a car (this also includes vans, pickups or panel trucks) will be 50 cents per business mile driven.  The new rates are lower than last year’s. The IRS states that the lower mileage rates for 2010 reflect decreased transportation costs compared to a year ago.

Employees are normally reimbursed for business mileage

This is the rate most companies reimburse employees who operate their personal automobile on the job.  This is the rate the IRS will allow the company to expense against its taxes so it is the rate they pay employees. 

Are you paying your independent contractors mileage expenses?

Many businesses also reimburse their IC’s for mileage (and travel) expenses incurred while providing services.  It happens everywhere and alone won’t create a misclassification.  However, in a traditional common law model a true IC is an independent business responsible for his/her own expenses, including mileage.  When you pay a consultant’s mileage expense (or any other reimbursement for expenses, supplies and equipment expenses) you have begun the slide down the slippery slope to misclassification. It is one factor that can point to employee.

Why does reimbursing mileage, providing a computer, email, telephone, supplies, materials, tools, software applications, workspace, or other material assistance tend to make someone look like an employee?

In the traditional model, an independent contractor (or business) pays its own expenses from gross receipts or revenues.  Employees, on the other hand, expect to be reimbursed for these expenses, above and beyond their wages, as part of the employment relationship.

There are two primary explanations why this is so

1. Financial Investment and the Risk of Loss are primary characteristics of an IC and all independent businesses.  Independent businesses traditionally have a monetary investment in their business (time spent working doesn’t count), including paying for their own expenses and the other Costs of Doing Business.  In theory, if things don’t go well, an IC can actually spend more money to complete the job than he/she makes. 
2. When the principal reimburses the worker for travel expenses or provides the materials, supplies, work space and other tools (such as proprietary hardware or software) to perform a job, there is an implied right to control how those assets are utilized on the job. Applying that to reimbursement for travel expenses means how the worker will conduct himself (driving safety, how much to spend on a hotel or for meals, if and where he/she can stay, etc).  That, in turn, implies the principal company has the right to direct and control the contractor on the job.  Direction and control of the details of the job is a primary factor in determining if an employment relationship exists or not.

Therefore, the more supplies, materials, tools and workspace, etc. someone is provided to perform the work, the more they look like an employee.

No single factor will make the difference.

If you’re thinking this doesn’t make sense because it means everyone is misclassifying their consultants and contractors, remember, no single factor alone will decide the consultant’s status.  Each factor can be weighted differently depending on the profession and the circumstances of the project.  Reimbursement of mileage expense is just a portion of one factor to be considered, but it can make the difference if other factors are pointing one way or the other.  That’s why it takes a true expert to make these calls with the confidence of being correct.