Mind Your P’s and Q’s!

Do you have Independent Contractors working for you?  If so, you may want to familiarize yourself with the recently updated 2012 IRS Independent Contractor Guidelines. For federal tax purposes, the usual common law rules are applicable to determine whether a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. All evidence of the degree of control and independence in this relationship should be considered. The facts that provide this evidence fall into three categories: Behavioral Control, Financial Control and Type of Relationship. 

Behavioral Control refers to facts that show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work.

The Behavioral Control factors fall into the categories of:

  • Type of instructions give
  • Degree of instruction
  • Evaluation systems
  • Training

Financial Control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.

The Financial Control factors fall into the categories of:

  • Significant investment
  • Unreimbursed expenses
  • Opportunity for profit or loss
  • Services available to the market
  • Method of payment

Type of Relationship refers to facts that show how the worker and business perceive their relationship to each other.

The factors, for the Type of Relationship between two parties, generally fall into the categories of:

  • Written contracts
  • Employee benefits
  • Permanency of the relationship
  • Services provided as key activity of the business

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.  Don’t get too hung up on or reliant on any of the current guidelines – they may change at any moment. 

The above information is taken directly from the IRS website – www.irs.gov. Please view the links below for more detailed information.


Independent Contractor vs. Employee

Behavioral Control

Financial Control

Type of Relationship


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