The IRS' online resource page, Independent Contractor (Self-Employed) or Employee?, discusses the three categories that provide evidence of the degree of control:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

It's not always obvious in making that determination, and it's not just large employers that are subject to scrutiny. Even small companies can get audited which Debbie Fledderjohan writes about in her blog post, Six Common Triggers for an IRS Misclassification Audit:

The 1099 Independent Contractor (IC) files an unemployment claim. This creates suspicion because they are not eligible for unemployment.
The 1099 IC files a workers' compensation or disability claim against the company. If someone is truly an IC, they should carry workers' comp and disability insurance on themselves because they are not eligible through an employer.
A worker receives a W-2 and a 1099 Form from the same employer in one year. This happens when they are converted from a 1099 IC to a direct-hire of the company. But if they performed the same work as a 1099 IC and a W-2 employee, the IRS may wonder why they were not classified as an employee all along.
The worker files a complaint with the Department of Labor's Wage and Hour Division. With all the information out there about misclassification, workers are more savvy than your clients may think and can blow the whistle if they think they have been misclassified.
The worker feels they are being improperly treated as a 1099 IC and files a Form SS-8 with the IRS for their own classification determination or files a Form 8919, Uncollected Social Security Tax and Medicare Tax on Wages, with their personal income tax return.
The IRS is anonymously alerted about the worker or the employer not paying taxes.

But what if you make a mistake and that independent contractor is really an employee. How do you fix it? Here's how. There are two aspects to the fix.

Instant Insights /

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