Is your worker an employee or an independent contractor?
On its website, the IRS provides information regarding worker classification as an employee or an independent contractor, when an employer files both a Form W-2 and a Form 1099-MISC for the worker in the same year.
What the IRS Considers
- Was the worker treated as an employee for part of the year and an independent contractor for a separate part of the year? Were the payments reported on Form W-2 and Form 1099-MISC for the same services but for distinct periods of time during the year?
- Was the worker performing two or more distinct services and did the employer consider the worker to be an employee for one service and an independent contractor for the other service? This individual would be considered a dual status worker.
- Did the payment reported on Form 1099-MISC representadditional compensation to the worker in his capacity as an employee for which he received compensation reported on Form W-2? An example of this would be reporting a bonus payment or fringe benefits on a Form 1099-MISC instead of a W-2.
Tax Court Factors
The Tax Court has established various factors to determine whether to classify a worker as an employee or an independent contractor. These factors include:
- The degree of control exercised by the employer over the details of the work;
- Whether the employer or the worker invests in the facilities used in the work;
- The opportunity of the worker the generate a profit or a loss;
- Whether the employer has the right to discharge the worker;
- Whether the work is part of the employer’s regular business;
- The permanency of the relationship; and
- The relationship the parties believe there are creating.
The most critical test in determining the nature of the working relationship is the employer’s right to exercise control over the worker. A link to the IRS website that provides more information on the issues identified above may be found [here].