Individuals classified as independent contractors are not considered employees. Employers are not responsible for providing unemployment insurance coverage or for matching social security and Medicare taxes of independent contractors.
Determining who is considered an independent contractor can be confusing. For tax purposes, the IRS considers the following three main categories in making determinations.
|Behavioral Control - These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee, not an independent contractor, when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.|
| ||Instructions - If workers receive extensive instructions on how work is to be done, this suggests that workers are employees.|
| ||Training - If the business provides workers with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that workers may be employees.|
|Financial Control - These facts show whether there is a right to direct or control the business part of the work.|
| ||Significant Investment - If workers have a significant investment in the work, they may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.|
| ||Expenses - If workers are not reimbursed for some or all business expenses, then they may be an independent contractor, especially if the unreimbursed business expenses are high.|
| ||Opportunity for Profit or Loss - If workers can realize a profit or incur a loss, this suggests that they are in business for themselves and that they may be an independent contractor.|
|Relationship of the Parties - These are facts that illustrate how the business and the worker perceive their relationship.|
| ||Employee Benefits - If workers receive benefits, such as insurance, pension, or paid leave, this is an indication that they may be employees. If workers do not receive benefits, however, they could be either an employee or an independent contractor.|
| ||Written Contract - A written contract may show what both the worker and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts..|
The U. S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the Fair Labor Standards Act (FLSA). The Court has held that the total activity or situation should be considered. Among the factors which the Court has considered significant are:
|The extent to which the services rendered are an integral part of the principal's business.|
|The permanency of the relationship.|
|The amount of the alleged contractor's investment in facilities and equipment.|
|The nature and degree of control by the principal.|
|The alleged contractor's opportunities for profit and loss.|
|The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor..|
|The degree of independent business organization and operation..|
There are certain factors which are immaterial in determining whether there is an employment relationship. Such facts as the place where work is performed, the absence of a formal employment agreement, or whether an alleged independent contractor is licensed by State/local government are not considered to have a bearing on determinations as to whether there is an employment relationship. Additionally, the Supreme Court has held that the time or mode of pay does not control the determination of employee status.
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