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Contractor vs. Employee


One of the most common questions I have been asked recently is how to determine whether a worker is considered an independent contractor (thereby needing to complete a 1099) or an employee (W-2). Most cases are fairly cut and dry, but there are times where this can be a grey area. The temptation is to classify an individual as a contractor because of savings in employment and unemployment taxes, worker’s compensation insurance, and to avoid state and local tax reporting. But how does the IRS view this issue?

Most simply, the IRS looks at 3 primary factors that are based on the degree of control versus independence:

  1. Behavioral: Does the company control, or have the right to control, how the worker does his or her job? Less control=more likely a contractor.
  2. 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.) More financial control=more likely an employee.
  3. 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? A contract and end date for the job=more likely a contractor.

If the above list does not clear things up, then the IRS also provides 20 questions to determine the level of control.

1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
4. Must the individual personally perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
6. Is there a continuing relationship between your company and the individual?
7. Must the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Must the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses?
14. Do you supply the individual with needed tools or materials?
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?

What is interesting about this issue is that there is very little, if any, case law from the IRS’s perspective. Most case law relates to workers compensation and unemployment issues. In those cases, the courts have rule that some control is allowable when classifying an individual as a contractor.

Odds are you now have more questions than answers regarding the proper status of your team. Give us a call and we can review your business’ situation to help you to navigate the grey area of contractor versus employee.

Are You Getting Your Money’s Worth From Your Employees?


In today’s business environment the saying “cash is king” is still very much true.  This is because cash is needed to meet our financial obligations.  As business owners and leaders, one of our major cash obligations is payroll.  Payroll can include salaries, taxes, insurance and various other perks that you company may offer.  With a watchful eye towards your cash flow, the question you are probably asking is, “Am I getting my money’s worth for my employees?”  Below are a few key performance indicators of payroll:

  • Sales – the most common performance indicator for employees is the amount of sales they generate.  This number is easy obtain and compare among various employees; however, it can be very deceiving. For example, Employee A and Employee B may both have the same sales number, but Employee A may be selling items with lower margins. This may cause lower overall earnings even though the revenue is higher. Thus, a sales performance indicator needs to go beyond just revenues.
  • Sales Volume – as with “sales”, the volume of sales is also very easy to track. Please note, you can have the same issues with this number management as you do with sales performance indicators. The number of products of all your employees may not necessarily indicate the current financial worth of each employee.
  • Time – another performance indicator is the amount of time each employee spends on the work he or she performs. This indicator is most useful for service and project based industries. However, the assumption that the more hours spent on work equals more productive employee is not always true. If you pay an employee $25 an hour and they spend 10 hours on a project that you are billing for $100, the employee is actually losing money for your business.
  • Space – another consideration is the amount of space the company needs for its employees. The more employees you have, the more square footage of lease spaces needed to house those employees in your office. With today’s technology, many employees have the capability of working outside of the office location (such as from home). Although not all employees are able to work independently, this is a great cost savings measure that can reduce your monthly fixed rent.

Each of these performance indicators needs to be tailored to your specific company. If not used properly, your company could be losing money on unproductive employees.  If you have any questions concerning the productivity of your employees, please feel free to call us and we can tailor performance indicators specifically to the needs of your company.