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Independent contractor or employee: the IRS wants to know

Imagine your Minnesota business has workers with desks in your building, who maintain regular hours and receive instruction and guidance from management. Are those people independent contractors? Not likely.

If you are an employer who has people performing the same function as other people, the Internal Revenue Service may disagree with your claim that some of them are independent contractors and others are employees. Independent contractor misclassification is an area of tax law that has had varying levels of scrutiny in past years. That scrutiny appears to be on the rise again according to a recent news source.

Apparently, the misclassification of workers into the independent contractor status has cost the IRS $1.6 billion. It is estimated that as many as one in seven businesses misclassified at least one worker.

There is a 20-point test an employee or employer could take to determine the correct status, although there is a shorted litmus test of sorts that can be used to determine if someone is an employee. It looks at three main points of control.

  • Behavioral control: Is the worker told how to accomplish tasks and what tools to use? If so, that may be an employee.
  • Financial control: Does the worker share in any risk depending on how the company is doing, or do they get paid if they do their job? Lack of risk indicates employee status.
  • Exclusive relationship: Does the worker have more than one employment relationship, or just one? Can he or she be fired? If so, that may be an employee.

If in doubt about the tax ramifications and status of a potential employee, a legal professional can provide guidance that will keep you on the right side of the IRS and its litmus test.

Source: Red Wing Republican Eagle, "Independent contractors aren't employees," Melissa Cushing, July 2, 2012

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