http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

After reviewing the three categories of evidence, if you are still unsure if a worker is an employee or an independent contractor, the business can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.

Be aware that it can take up to six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form Form SS-8 (PDF).

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The IRS announced in May of 2007 that worker classification cases would be a major area of emphasis in 2008. In March of this year the DOL investigated a Texas water company and found that over 200 employees had been incorrect misclassified as independent contractors. The company ended up owing nearly $600,000 for two years of missed overtime pay. The IRS recently delivered FedEx a $319M tax hit due to classification issues.

Is my worker an employee or independent contractor?

Ask these questions:

Do you tell the employee when and where to report to work?

Is the employee given instructions on how the work is to be performed?

Is the work supervised by anyone on your staff?

Is the employee covered by any of your fringe benefit plans?

Have you issued the employee a company ID card?

Are you providing business cards, stationery or other company property?

If yes to the above, the worker more than likely is an employee, not an independent contractor.

Check the IRS 20 Factor Test for Determining whether the worker is an employee or independent contractor. Go to: www.comptroller.ilstu.edu/downloads/20-factor-test-for-independent-contractors.pdf

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