Most of you would look at the question in this title and say, “NEVER!” That answer will generally serve you in most situations, but, as it turns out, it is possible to be both.

It’s best to be judicious in the use of independent contractors.

The U.S. federal government, in particular, the IRS and the US Department of Labor, sees the use of independent contractors as a way for employers to get around paying taxes. Thus, there’s been a concerted effort to clamp down on the use of the IC.

The standards have been around for quite a while, with the IRS publishing the 20 Factor Test  to provide guidance to employers in the past. More recently, they’ve created a different set of rules that provide guidance for classification based on the amount of control that is exercised over a worker. This control is divided into three categories: behavioral control, financial control, and the nature of the relationship.

Behavioral Control

The IRS defines behavioral control as the factors that determine whether the business has a right to direct and control how a worker does the task for which he or she was hired. If the business tells the employee:

  • When and where to do the work;
  • What tools or equipment to use;
  • What workers to hire to assist with the work;
  • Where to purchase supplies and services;
  • What work he or she must perform;
  • What order or sequence to follow; and/or
  • How to do the work by providing training;

Then the worker is most likely NOT going to be considered as an independent contractor. Even if no instructions are provided, there may still be control involved if the business dictates how the work results are to be achieved.

Financial Control

Financial control depends on many issues. These include:

  • The extent to which the worker has unreimbursed business expenses;
  • The extent of the worker’s investment;
  • The extent to which the worker makes his or her services available to the relevant market;
  • How the business pays the worker (An independent contractor is often paid a flat fee or on a time-and-materials basis for the job, whereas an employee is generally paid a guaranteed wage.); and
  • The extent to which the worker can realize a profit or loss.

Type of Relationship

Factors that go into this determination are things like contracts; the permanency of the relationship; whether the business provides insurance or other benefits; and how integral what the worker does is to the operations of the business. A good example would be a chef for a restaurant. A chef is integral to the business of preparing food and would not be considered an independent contractor. A specialist chef, who prepares food for a one-time event for the restaurant, could be considered an independent contractor.

Statutory Employee

According to the IRS, there is one group of workers who may meet the standards of being an independent contractor under the above-mentioned common law standards, yet at the same time must be considered employees for the purposes of having employment taxes withheld. These people are known as “statutory employees” if they fall any of the following four categories:

  1. A driver who distributes beverages (other than milk), or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
  2. A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.
  3. An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name if you also furnish specifications for the work to be done.
  4. A full-time traveling or local salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson’s principal business activity.

In addition to these four categories, there are also three tax conditions that must be met. These are:

  1. The service contract states or implies that substantially all of the services are to be performed personally by them.
  2. They do not have a substantial investment in the equipment and property used to perform the services (other than an investment in transportation, such as a car or truck).
  3. The services are performed on a continuing basis for the same payer.

If these three conditions are met, then the employer must withhold Social Security and Medicare taxes from payments made to these employees.

So, those are the unusual conditions in which you can have an independent contractor who is also an employee. Employers must take care of today to preserve and to correctly apply all of the required standards.

USDOL Standards

The US Department of Labor also has a standard for independent contractors, which mirrors in many ways the IRS standards. They throw in an additional standard, based on:

“the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).

What to Do

If you’re an employer, it’s important to understand and apply these standards, since there are major tax and wage consequences. On the state level, mistakes in misclassification will also have an impact on workers’ compensation rates.

If you’re an employee working under the title of Independent Contractor, it’s also important for you to understand these requirements. If you are improperly classified, you may not get back any taxes you’ve paid.

Read our white paper to learn about best practices for hiring contractors and freelancers.

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Andreea Hrab

International HR Director for OSF Global Services, Andreea is a veteran recruiter who has seen them all. She developed HR recruiting strategies and retention programs that guarantees the success of the company. She is a people person and she handles very easy new relationships with new employees, but her most interesting challenge is to find the middle way between company’s best interests and employee’s needs. To learn more about Andreea contact her on LinkedIn.

4 Comments

  • Avatar Ron Peterson says:

    In order not to face problems connected with taxes it is always important to define business relationship between you and your employer. If you are hired as an independent contractor don’t be reluctant to ask what that means and what relationship stand behind that notion.

  • Avatar Kelly Seiden says:

    I agree that an independent contractor is different from an employee, but the exact definition of the former is not set in stone. That’s why I would follow the pattern of defining exact role and kind of relationship which are going to appear in order to avoid unpleasant surprises.

  • Avatar Norm Hankins says:

    Can a person be a statutory employee and an independent contractor at the same time with the same employer?

  • Avatar Fxpert says:

    What can I do as an “independent contractor”, who is an employee according to this, and haven’t had any taxes or social security withheld?

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