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December 13, 2012   Business Entities & Succession Planning

20 Factors To Determine Independent Contractor Status: What Business Planners Need to Know

By Randy Gardner, J.D., LL.M., CPA, CFP®


Randy Gardner, J.D., LL.M., CPA, CFP®
Director of Education, WealthCounsel 

An increasing number of business owners are addressing their human capital needs by hiring independent contractors.  Business owners benefit by avoiding the administrative hassles of employing workers and the out-of pocket costs of payroll taxes and fringe benefits.   The trend toward independent contractors will likely continue as business owners cope with the insurance mandate of President Obama’s Patient Protection and Affordable Care Act by hiring independent contractors rather than full-time workers.  
 
Behavioral Control Factors: These factors measure whether there is a right to direct or control how the work is done.
  1. Few instructions are given to the contractor about how, when, and where the work is done.20 Factors to Determine Independent Contractor Status
    1. Little training is provided by the company.
    2. The contractor’s services are not integrated with the company’s operations.
    3. The contractor is not required to perform the services personally.
    4. The contractor hires, supervises, and pays his or her own assistants.
    5. The relationship with the company is not continuing or is infrequently recurring.
    6. The contractor set his or her working hours.
    7. The contractor does not work full-time for the company.  
    8. The contractor does not work at the company’s location.
    9. The contractor sets the steps in which the work will be done.
    10. The contractor is not required to submit written or oral reports.   
    Financial Control Factors: These factors measure whether there is a right to direct or control how the business aspects of the worker’s activities are conducted.
    1. The contractor is paid by the job rather than by the week or month.
    2. The contractor is not reimbursed for business or traveling expenses.
    3. The contractor provides his or her own equipment and supplies.
    4. The contractor invests in the facilities used for doing the work.
    5. The contractor can realize a profit or suffer a loss as a result of providing the services.
    6. The contractor works for many different companies at the same time.
    7. The contractor’s services are available to the general public on a regular basis.
    Relationship Factors: These factors measure how the parties perceive their relationship.
    1. The contractor cannot be fired as long as he or she produces the requested work.
    2. The contractor cannot terminate the relationship with the company until the work is complete.
    The application of these factors is illustrated by a recent case.  In Atlantic Coast Masonry, Inc. (Tax Court, 2012), the IRS reclassified masons as employees and charged the construction company $700,000 in back taxes.  Although the workers provided their own tools and were free to seek employment as masonry workers with other businesses, the business always delivered instructions to the workers prior to commencement of the project and many workers worked exclusively for the construction company. Also the workers worked a required eight-hour day; they could be fired at will; and they received weekly cash payments based on their productivity.  In other words, how the business owners and contractors characterize the relationship does not necessarily control.  

    There are three important steps business owners can follow to make sure the independent contractor relationship is honored.   
    • First, define the relationship in a written business document.  
    • Second, structure the work relationship in such a way, using the 20 factors as a guide, that it is an independent contractor relationship.  
    • Third, comply with the IRS’s reporting requirements, primarily the issuance of Form 1099s for the independent contractors. 
     
    About the Author:
     
    Randy Gardner, J.D., LL.M., CPA, CFP® (gardnerjr@umkc.edu) is the Director of Education for WealthCounsel and The Advisors Forum. He is also co-author (with Julie Welch) of 101 Tax Saving Ideas and co-author (with Leslie Daff) of The Closing Wealth Transfer Window.  

    Randy Gardner will be speaking on this topic at our Las Vegas Business Planning Boot Camp In March 2013. Register today! 
     
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