By Bent Ericksen and Tim Twigg
A doctor retained a person to perform bookkeeping services. The person did not work in the practice and provided similar services for another dentist. The doctor considered the person to be an independent contractor and did not deduct payroll taxes or pay employer-related taxes. The doctor was audited for failure to pay payroll taxes, since it was ruled that the person did not qualify as an independent contractor.
Considerations
Many employers think they somehow benefit if workers are independent contractors, rather than employees.
Determining whether a person qualifies as an employee or an independent contractor can be challenging due to differing government definitions.
The Department of Labor (DOL) classifies an independent contractor as an individual who is self-employed. It defines an employee as someone who is dependent on the business that he or she serves.
The Internal Revenue Service (IRS) looks at:
1) The level of employer control over the worker’s behavior. For example, are the worker’s services a key aspect of the company’s regular business activity? If so, it is more likely that you have the “right to direct or control the worker’s activities and how the work is done,” and therefore an employee relationship exists.
2) Does the worker have a “significant investment” in the work or can he or she realize a profit or incur a loss? Independent contractors often have a significant investment in the facilities, equipment, and tools to perform services for someone else, but not an investment in the profit or loss of the business for which they are performing services. Employees are guaranteed a regular wage amount; independent contractors are often paid a flat fee for the job.
3) What is the relationship of the parties? Does the worker receive employee benefits, such as insurance, a pension plan, vacation pay, sick pay, etc.? If so, it shows an employer/employee relationship.
4) How is the person paid? Employees have certain tax deductions withheld from their paychecks. Independent contractors are responsible for paying their own income taxes and self-employment taxes.
Then there is the Supreme Court, which has determined that the employer-employee relationship cannot be based on isolated factors or upon a single characteristic. The Supreme Court says it depends upon the relationship of a number of circumstances taken as a whole, including:
☛ The extent to which the worker’s services are an integral part of the employer’s business.
☛ The permanency of the relationship. For example, how long has the worker worked for the same company?
☛ The amount of the worker’s investment in facilities and equipment. Does the worker use his or her own tools or equipment?
☛The nature and degree of control by the company relative to hours worked, quality control, and rate of pay.
☛The worker’s opportunities for profit and loss, either as an owner or through an established profit-sharing or bonus plan.
☛ The level of skill required in performing the job.
With these lengthy, different, and, in some cases, contradictory definitions, how can an employer not be vulnerable to these fines and penalties?
Solutions
First and foremost, be sure - based on a strict interpretation of the definitions - that an independent contractor relationship exists. This is typically decided based on “control.” If you assert a significant degree of control and supervision regarding the worker’s schedule and production, it is likely he or she will be considered an employee. If the control is only over the “result” of the work done, but not the means and methods of achieving that result, then an independent contractor relationship may exist.
It also is more likely that an independent contractor relationship exists if the person has his or her own company or business name, a business license, and you receive invoices for services on the contractor’s business stationery.
If you feel an independent contractor relationship exists, then be sure to maintain accurate records, follow the rules on Form 1099, and have a written agreement with your independent contractor. If an employee relationship exists, adjust compensation provided to reflect employer-related costs (taxes and benefits). Then, it shouldn’t cost any more money either way, and you are assured of not having problems with any government agencies or workers. If there is any doubt, play it safe and treat the person as an employee.
Bent Ericksen is the founder and Tim Twigg is the president of Bent Ericksen and Associates. For over 25 years, the company has been a leading authority in human resources and personnel issues, helping dentists successfully deal with the ever-changing and complex labor laws. Both authors are members of the Academy of Dental Management Consultants. To receive a complimentary copy of the company’s quarterly newsletter or to learn more, contact them at (800) 679-2760 or at www.bentericksen.com.
