As the new year begins, you may be contemplating an addition to your company. The thought crosses your mind about not putting them on payroll, but paying them as an independent contractor.
Be aware this is an area on the IRS radar. A large amount of money is lost each year by the U.S. Treasury due to worker misclassification.
Therefore, you need to look at the factors the IRS considers when reclassifying workers as employees. There are 20 common law factors in Revenue Ruling 87-41 reviewed by the IRS. Instructions provided to workers, training, hours, and location are some of the factors to consider. The main point to consider is who has control over employee behavior and the relationship between the parties.
There are safe harbor rules to consider when making the decision. Section 530 of the Revenue Act of 1978, P.L. 95-600 lists some rules. An individual will not be considered an employee if the payer:
consistently treated other workers performing the similar task as nonemployees; had a reasonable basis for not treating as an employee; filed the Form 1099-MISC for all individuals.
Still not sure? You can request a determination from the IRS. Prepare and file Form SS-8 with the IRS. It should be noted that most of the requests are filed by workers who think they are employees and entitled to benefits.
As with any business decision, it is always wise to check with your trusted advisor.