The basic definition of an independent contractor is:  a person who is in business for himself or herself – and who is not considered an employee.  In some cases, it can be easy to identify an independent contractor.  For example, the IRS actually indicates that the following come under the definition:  “doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers.”

But there are many other situations where it is far from clear if a person is an independent contractor or not.  Yet if you get the determination wrong, the consequences could be severe.  You may need to pay back payroll taxes, penalties and interest to the IRS.  There could also be violations of other federal agencies, like the Department of Labor, and state agencies (such as regarding workers’ compensation).

While the IRS has 20 rules for the classification of an independent contractor, they are not necessarily clear cut.  Keep in mind that it is really about evaluating the facts and circumstances of each case.  No doubt, this can mean lots of gray area.

But let’s take a look at some of the main factors — to get a sense of what the IRS is looking for:

Control:  This is the most critical.  That is, you are not allowed to provide ongoing direction and supervision on how a person does the work.  Some indications of control include:

  • Schedules of when to show up and leave
  • Training requirements
  • Dress code
  • Reporting to a manager
  • Providing tools and equipment

Business:  A contractor should essentially be running a business.  Factors that would support this include:

  • Multiple customers
  • Recurring business expenses, such as for rent, equipment, tools, insurance, marketing and advertising
  • There is a business name
  • There are employees
  • There are contractors

Method of Payment:  A flat-fee arrangement is strong evidence of an independent contractor relationship.  Although, it may be customary for hourly fees with professions like CPAs and attorneys.

It will also look like an independent contractor relationship if there are no reimbursement of expenses.

Intent:  Do the parties truly believe there is an independent contractor relationship?  A key to this is if there is a written contract

Benefits:  An independent contractor does not receive health insurance, paid vacations, a retirement plan and other typical employee benefits.

Get Advice:  As you can see, this can be complex stuff.  So if you are unsure about a classification, then you should seek professional advice, such as from a qualified attorney.

The IRS also has a service that will indicate if a person is an independent contractor.  This is done with the filing of Form SS-8.

4 Comments » for What Is An Independent Contractor?
  1. Denny Calloway says:

    In 2013 the local utility company damaged the sewer line coming into my house. I had to pay for the repairs and then submit receipts for reimbursement. The company sent me a 1099-Misc for the amount of the reimbursement. This is not compensation. I have pointed this out to them, but received no answer. What can I do?

    • ttaulli says:

      Based on what you emailed me, it looks like the company sent it in error and that you made an effort for them to correct it, which was the right move.

      The next step is to call the IRS at 1.800.829.1040 and provide them the details of the matter. They will want to know your Social Security Number to do a check as well as the name, address, and phone number of the company. From there, the IRS will contact the company to correct the situation (this usually gets their attention).

      Unfortunately, hold times can be long when calling the IRS….But if the 1099-MISC form is not corrected, then you will have a false tax return!

  2. Kathleen says:

    My friend is an independent contractor for a jewelry line. She does not have a company and works under her name only. I began working with her taking over part of her territory selling jewelry. I am working under my name as well as of right now. We are splitting the commissions 50/50 however she is the one collecting the money from the jewelry lines. Can she as an individual provide me with a 1099 at the end of the year or does she have to be a company to do that? Also, if she can’t provide a 1099 how would we handle this?

    • ttaulli says:

      If your commissions were over $600 for the year, then you should get a 1099. But even if she does not provide one, you still need to report the income.

      Also, you will probably need to file a Schedule C with your 1040. On this, you will report your income and any expenses for the business.

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