What Is An Independent Contractor?

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 (surprise, surprise).  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 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 exists 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.

Still have question?  If so, feel free to contact us.