Many businesses would rather pay independent contractors (“contract labor”) than employees. This practice allows the company to avoid paying payroll taxes and to exclude the independent contractor from fringe benefit and retirement plans.
Many people would rather receive “contract labor” payments than wages. As discussed in Tax Saving Idea #69, this allows the person to deduct expenses in computing adjusted gross income.
The IRS has been focusing attention on independent contractors. The IRS thinks many independent contractors do not report all their income.
You can use the following 20 factors to structure your work arrangements with your customers and help prove you are an independent contractor. These factors are the tests applied by the courts in determining employment status. No single factor is controlling, nor is any particular weight given to any one of the factors.
Behavioral Control Factors
These factors measure whether there is a right to direct or control how the work is done.
- Few instructions are given to you about how, when and where you are to work.
- Little training is provided by the company.
- Your services are not integrated with the company’s operations.
- You are not required to perform the services personally.
- You hire, supervise and pay assistants.
- Your relationship with the company is not continuing or is infrequently recurring.
- You set your working hours.
- You do not work full-time for the company.
- You do not work at the company’s location.
- You set the steps in which the work will be done.
- You are not required to submit written or oral reports.
Financial Control Factors
These factors measure whether there is a right to direct or control how the business aspects of the worker’s activities are conducted.
- You are paid by the job rather than by the week
- or month.
- You are not reimbursed for your business or traveling expenses.
- You provide your own equipment and supplies.
- You invest in the facilities you use for doing the work.
- You can realize a profit or suffer a loss as a result of
- your services.
- You work for many different companies at the same time.
- Your services are available to the general public on a regular basis.
Relationship Factors
These factors measure how the parties perceive their relationship.
- You cannot be fired as long as you produce the requested work.
- You cannot terminate your relationship with the company until your work is complete.
You are writing and implementing a marketing plan for ABC Company. You work 15 hours per week at ABC Company’s office for $40 per hour. You use ABC Company’s computers, copiers, and phones. For the rest of the week, you serve a variety of other companies on a project-by-project basis. You may be an employee of ABC Company because you provide the services personally, work at ABC Company’s office and use ABC Company’s equipment.
If you wish to be an independent contractor, you may want to restructure your relationship. First, you might work at your office rather than at ABC Company’s office. Second, you might use your own computer and equipment. Third, you might arrange to be paid on a project basis. Fourth, you might have a written agreement with ABC Company.
Julie Welch (Runtz), CPA, CFP, and Randy Gardner, LLM, CPA, CFP, are the authors of 101 Tax-Saving Ideas, 9th edition, published by Wealth Builders Press. To order ($27.95), call 816-561-1400, fax 816-561-6296 or email
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