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The New Rules for Determining Independent Contractor Status

road signs showing independent contractor one way and employee the other way

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In recent years, the IRS has been cracking down on employers who misclassify their workers as independent contractors. If you’re found to have misclassified an employee as an independent contractor, you could be on the hook for a hefty tax bill and penalties. So, how can you avoid having your independent contractors classified as employees? By understanding the new rules for determining independent contractor status, that’s how.

The old rules for determining whether a worker was an employee or an independent contractor were based on a simple test of control. If the employer had the right to control how the worker did his or her job, then that worker was classified as an employee.

However, if the employer didn’t have that right of control, then the worker was free to work when and how he or she pleased. That worker would be classified as an independent contractor.

The new rules are much more complex. Now, there are a number of factors that will be taken into account when determining whether your workers are employees or independent contractors. These factors include:

• The extent to which the worker is integrated into the company’s business. For example, if the worker is expected to comply with company policies and procedures, he or she is more likely to be considered an employee.

• Whether the worker is economically dependent on the company. For example, if the worker relies on the company for a steady stream of work assignments, he or she is more likely to be considered an employee.

• The degree of control the company has over when and where the work is done. For example, if the company requires the worker to come into the office at specific times or to complete work within certain deadlines, he or she is more likely to be considered an employee.

• The amount of training provided by the company. For example, if the company provides extensive training on its products and services or on how to do the job itself, then the worker is more likely to be considered an employee.

• Whether there is a written contract between the company and the worker that clearly spells out that the worker is an independent contractor. This isn’t necessarily determinative. The IRS will still look at all of the other factors listed above. However, having a contract in place will generally weigh in favor of independent contractor status.

Of course, this list isn’t exhaustive; there are other factors that may come into play when determining whether a worker is an employee or an independent contractor. But these are some of the most important ones to keep in mind.

Conclusion:

If you’re thinking about hiring an independent contractor, it’s important to understand the new rules for determining independent contractor status. These rules are much more complex than they used to be. If you’re found to have misclassified an employee as an independent contractor, you could be facing a hefty tax bill and penalties. So make sure you take all of the relevant factors into account before making your decision. If you’re ever in doubt, err on the side of classifying the worker as an employee.

About Author

Picture of Rick Mak

Rick Mak

Rick Mak is a 30-year veteran businessman, having started, bought, and/or sold more than a dozen companies. He has bachelor's degrees in International Business, Finance, and Economics, with masters in both Entrepreneurship and International Law. He has spoken at hundreds of conferences around the world during his career on entrepreneurship, international tax law, asset protection, and company structure. Business Anywhere Editorial Guidelines

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