The IRS, or Internal Revenue Service, has a set of guidelines for determining whether a worker is an independent contractor or an employee. This distinction is important because it affects how a worker is taxed and what benefits they’re entitled to. If you’re a freelancer or self-employed, it’s important to understand the rules behind independent contractor status. Here’s how the IRS determines whether someone is an independent contractor.
1. Behavioral control: This factor looks at whether the employer has the right to control how the worker does their job. If the employer has the right to dictate the methods and procedures used to complete the work, then the worker is likely an employee. On the other hand, if the employer only cares about the end result and doesn’t dictate how the work is done, then the worker is likely an independent contractor.
2. Financial control: This factor looks at whether the employer has the right to control the financial aspects of the work. If the employer provides tools and supplies, pays for expenses, and sets a wage or salary, then the worker is likely an employee. On the other hand, if the worker provides their own tools and supplies and is paid by the job or project, then the worker is likely an independent contractor.
3. Relationship: This factor looks at the nature of the relationship between the employer and the worker. If there is a written contract that specifies the worker’s status as an independent contractor, then the worker is likely an independent contractor. Additionally, factors like the length of the relationship, whether the worker receives benefits like health insurance, and whether the worker is free to work for other clients all factor into the determination of independent contractor status.
It’s important to note that no one factor is determinative in determining independent contractor status. The IRS looks at the totality of the circumstances to make a determination. Additionally, the IRS may audit a worker’s status even if both the employer and the worker agree that the worker is an independent contractor. This is because misclassification can lead to tax penalties and other legal issues.
In conclusion, the IRS uses a set of guidelines to determine whether someone is an independent contractor or an employee. These guidelines consider factors like behavioral control, financial control, and the nature of the relationship between the employer and worker. It’s important for freelancers and self-employed workers to understand these rules to avoid misclassification and potential legal issues.