Independent Contractor Determination Rules
Various tests exist for determining employee vs. independent contractor status. The once common "20 Common Law Factors Test" of the IRS, has been replaced by a new category test. This test examines the worker employer relation in three areas:
1. Behavioral control covers the amount of control the employer has over the worker in terms of where, when, and how the job is done, among other factors.
2. Financial control dictates how much control the company has over a worker's pay, business expenses, and facility investment.
3. Relationship type is based on written agreements, employee benefits, and length of relationship between the company and worker.
For IRS help with classifying your workers, you can file Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding."
Meeting the IRS test is not the only hurdle to determine independent contractor status. Fair Labor Standards Act (FLSA) covers several criteria including if the service requires special skills.
If you do decide to go the independent contractor route, then develop a specific contractor agreement and make certain the contractor is insured to reduce your potential risks. Hiring an independent contractor can be the right choice for small companies not yet ready to make the leap to having a full staff.
