Worker Classification

Health reform has put worker classification back in the spotlight.

The IRS is aggressively attacking W-2 vs 1099 income.

The IRS has historically used a 20-point test to determine if a worker is an employee or an independent contractor.

‘Control’ has always been the main focus.

The IRS boiled the 20-point test down to 3 categories:

Behavioral Test – Does the employer control what the worker does and how he/she performs the work? What type and degree of instruction is given about when, where and how to do the job?

Financial Test – Will the employer reimburse for travel, who will pay for job-related tools and supplies? Hourly pay is indicative of employee status vs being paid a single amount to complete a job. Can the worker work for more than 1 firm and can the worker make a profit or suffer a loss? Does the worker carry his/her own insurance, have letterhead and business cards?

Type-of-Relationship Test – Does the employer provide paid vacations, sick leave, retirement benefits? Is the worker hired indefinitely or for a specific project or period of time?

The IRS ignores contracts that state a worker is independent. They use the above to determine status. The penalties are steep. Bottom Line – if the worker is an employee, pay them as a W-2.