Last week, we addressed how Collabrus helps clients determine the proper classification for projects and consultants. If you recall, when our example CPA had four corporate clients, plus several friends and family clients for year-end income tax service, she was considered an independent contractor (IC). However, when she converted to a single, full-time corporate client, even though she still provided year-end tax services for friends and family, she became an employee of the single corporate client.
Why did she become the employee of the corporate client?
Although there were other factors that helped tip the decision, the primary factor was she gave up her financial independence when she began working full-time for a single client. The year-end tax services she performed for her friends and family are probably not sufficient to keep her IC status year-round.
Would the services for friends and family still be considered IC?
Yes, most likely she was an IC for her extracurricular work during tax season and an employee for the full-time corporate client. That is, if we assume:
• She performs the extracurricular work on her own time
• Her friends and family pay her directly
• Her full-time employer has no part of the extracurricular transaction
Could the single client company be the employer even for the friends and family clients at the end of the tax year?
Let’s pretend our CPA works full-time for a CPA firm as an employee. Her duties are to manage and complete income taxes of the firm’s clients. She does friends and family taxes each year on her own time; however, she uses the CPA firm’s billing system to bill her friends and family. The friends and family pay the CPA firm for the service, which in turn, pays her (know, I wouldn’t do it that way either, but we’re just pretending).
This completely changes the picture. She no longer has financial control over her extracurricular work and since the employer is an accounting firm, the work is integral to the business. Therefore, the payments she receives for doing it will most likely be considered employee wages paid by the CPA firm. The slope is slippery. Many times, one or two facts can change the outcome.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.