Independent Contractors and the IRS
There are two ways for a firm to obtain the services of a technical contractor: hiring an independent contractor directly or hiring a contractor through an employment agency. With an uncertain economic climate continuing in New England, some firms are hiring independent contractors to help manage business fluctuations. Firms hiring independent contractors should be careful, as determining whether a worker is truly an independent contractor or is actually an employee is not a simple task. Incorrectly classifying an employee as an independent contractor can be a costly mistake, resulting in significant tax liabilities for a firm.

A less risky course of action is partnering with a contract employment agency to obtain contract professionals. When working with an agency, there is no risk of incurring tax liabilities associated with contractors.

For the information of firms preferring to hire independent contractors rather than partner with an agency, a brief discussion of the IRS guidelines for classifying workers follows.

Employee or Independent Contractor?
The IRS has developed guidelines to help firms determine whether a worker is in fact an independent contractor or is really an employee. In this determination, the relationship between the employer and the worker is the critical question. The IRS formerly used what was known as the Twenty Factor Test to determine whether a worker had been classified correctly. In a recent attempt to simplify the process of making an employee-independent contractor classification, the IRS has grouped facts that should be considered into three categories: behavioral control, financial control, and the type of relationship between the parties.

• "Behavioral control" refers to the extent that the employer directs or controls the manner in which the worker performs the work. The more an employer has the ability to direct the worker, the more likely it is that the worker is an employee and not an independent contractor. For example, if the employer provides guidance about when and where to do the work, or what tools or equipment to use, the worker is probably an employee. If the employer has not provided guidance on how the work is to be performed, but only on what is to be performed, the worker may be an independent contractor.
  
  
• "Financial control" refers to whether the employer controls the business-related aspect of the work. If the worker has the potential for profit or loss from the business relationship, the worker may be an independent contractor. In contrast, a prescribed 40-hour workweek with a set hourly pay rate may be indicative of an employee. Finally, if the worker offers his/her services to the general business community (for example, advertising or maintaining a business office), the worker is likely to be an independent contractor.
  
  
• "Type of relationship" refers to how the employer and the worker view their relationship. Factors to be considered include employer-provided benefits, expected duration of the relationship, and type of services provided by the worker. If a worker is receiving any benefits (for example, insurance or vacation) this indicates an employer-employee relationship. If the worker is hired only for a specific project or timeframe, the worker may be an independent contractor. If a worker provides services that are consistent with the firm's primary focus (for example, if an engineering services firm hires an engineer), the worker may be an employee.

Determining whether a worker is correctly classified as an independent contractor is rarely a straightforward exercise. This article mentions just some of the factors to be considered. If, after examining all factors, an employer is convinced that a worker is an independent contractor, then it is incumbent upon the employer to be certain that the independent contractor carries liability insurance, worker's compensation insurance, etc. Failure to do so could potentially expose an employer to additional liabilities.

To eliminate these risks, consider partnering with a contract employment agency. Contractor's provided by an agency are employees of the agency; therefore, a firm has no potential tax liability resulting from mistaken classification of a worker. An agency can also act as employer-of-record if a firm has already identified a contractor with whom it chooses to work.

Triad Engineering Corp has specialized for over 33 years in helping clients fill their technical staffing needs on a contract and contract-to-direct basis. Triad is locally owned and operated and offers the most personalized service and experienced staff available. Please contact us at 800-649-1514 or visit our web site www.triad-eng.com for more information.

Employers are encouraged to refer to the source for this article, IRS Publication 15-A (Rev January 2003), for more information and guidance concerning the classification of independent contractors. Incorrectly classifying an employee as an independent contractor can result in significant tax liabilities. Partnering with a contract employment agency eliminates the risk of improperly classifying workers