There has been an ongoing battle between the IRS and private businesses for as long as I can remember, and my memory goes back to the 1970s in the accounting profession.

 

IRS wants to classify EVERYBODY as an employee.  Why?  Because they guarantee Social Security, Medicare taxes are paid on earnings and most likely, Federal Income tax is withheld.  The alternative to the IRS way of thinking is trying, many times unsuccessfully, to collect those taxes from private taxpayers.  I can see the IRS position.  It makes logical sense.

 

Many private businesses have a revolving door of workers, which, trying to report them as employees, is an administrative nightmare, especially if those workers work for multiple companies, use their own tools and equipment and do NOT want to be classified as an employee.

 

Why would somebody NOT want to be classified as an employee?  Actually, it’s quite simple.  They incur substantial costs to provide services to a private business that, as an employee, they cannot deduct against their taxable income.  The IRS says there is a solution.  The employer should reimburse the employee for those costs incurred.  There is no law to require that though.  Such costs as providing an office in the home, using their personal vehicle for the private business, using their personal tools and equipment, using their personal cell phone, personal internet.  Paying for professional certifications, professional liability insurance, various supplies privately purchased which are used to provide the necessary services.  Travel costs, meal costs, special safety clothing, etc.

 

Recently, the IRS consolidated their determination factors on whether you have an independent contractor or an employee working for you.  1. BEHAVIORAL CONTROL:  If a business has the right to direct and control how a worker performs the required services, it’s a sign the worker should be classified as an employee.  Alternatively, directions from the employer concerning what should be done, but not necessarily HOW it should be done, may indicate an independent contractor status.  2. FINANCIAL CONTROL:  The financial arrangements between the parties often shows which of the parties has the right to control the job.  The ability to realize a profit or incur a loss for work is a strong indicator that the worker is in control and is an independent contractor.  3.  RELATIONSHIP BETWEEN THE PARTIES:  The legal and contractual relationships between the parties is also important in determining a particular worker’s status.  Certain benefits provided, such as sick time, vacation time, retirement contributions, etc. tend to indicate employee status.  Written contracts outlining the expectations for having completed a task, but not controlling how the work is done, is an indication of an independent contractor status.

 

If you pay attention to properly defining, treating, acting in a certain manner, it can point to you either having an employee or an independent contractor working for you.  Don’t forget, in either case, the IRS wants to know how much you paid that person.  Either by giving them a W-2 if an employee or a 1099 if an independent contractor.

 

Have you heard?  Ecclesiastes 3:9 says, “What gain has the worker from his toil?”

 

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  On the web at BullisAndCo.com  Also on Facebook