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  Contract Labor

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Your company has just won a major contract and you are anticipating the need for some short term employees to get you through the crunch period.  Since these employees can work out of their home and set their own hours, you decide to pay them as contract laborers instead of placing them on the payroll.

Good idea?   Maybe not.  With the downsizing that took place over the last few years, the IRS has seen an explosion of people being paid as outside contractors instead of employees.

Determining the classification between an employee and an independent contractor is not always easy, but the IRS often uses the following tests in deciding cases:

Factors Indicating An Employee Relationship

  • Detailed instructions are given by the business on how the job is to be performed.
  • A requirement exists that services be performed personally and not assigned to an assistant.
  • Assistants are hired and supervised at the direction of the business.
  • The person performing the service has a continuing relationship with the business.
  • The person performing the service is highly integrated in the operations of the business.
  • Hours are established by the business.
  • Most of the worker's business time is dedicated to one business.
  • The business controls where the work is to be done and pays based on time instead of completed jobs.
  • The business pays much of the worker's ancillary costs such as tools, travel, etc.
  • The worker (or the business) has a right to terminate the relationship without incurring contract performance liabilities.

 

Factors Indicating An Independent Contractor Relationship

  • The worker incurs some risk of financial loss in the business relationship.
  • The worker performs the service in question for more than one firm.
  • The worker receives "pre-employment" training as opposed to training on the job.
  • The worker can assign assistants to perform the work at his or her own discretion.

 

Please keep in mind that the list above is not "all-inclusive" and no one factor will usually determine the employer/contractor ruling.  Confusing?  Certainly, but we can help guide you though some of the issues whenever the need arises.

Congress recognized the complexity of this issue and granted some "safe haven" relief in the Small Business Protection Act of 1996.  You may qualify if you have historically treated certain employee groups as contractors and can meet the requirements under the Act.

 

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