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When discussing insurance needs with business owners, I find there's a big misunderstanding about what classifies an independent contractor.  Just because the employee is paid on a 1099, doesn't mean he or she is an independent contractor. The IRS and the State have specific rules on classifying employees, and misclassification can cause devastating problems for employers with federal and state government agencies, not to mention the potential for a legal action from the employee.

 

 

When economic times are tough and a business owner is trying to cut costs, it may be tempting for them to save payroll tax dollars (Social Security and Medicare taxes) by classifying an employee as an "independent contractor."  The employee may agree to it, but in most cases, really doesn't know what that means until they are let go and are denied unemployment benefits; or they are injured and try to file a workers comp claim only to find out there's no coverage.  Pretty soon you have the Attorney's General shutting down your operation, along with the IRS auditing your books, and the Sherriff's office delivering a summons to appear in court. 

 

Here are some general rules of thumb from the IRS to help business owners determine Employee or Independent Contractor status. 

Answering "Yes" to any of these questions means your worker is probably an employee.

  1. Do you have the right to give the worker instructions about when, where, and how to work? (This shows control over the worker.)
  2. Do you train the worker to do the job in a particular way? (Independent contractors are already trained.)
  3. Are the worker’s services so important to your business that they have become a necessary part of the business? (This may show that the worker is subject to your control.)
  4. Must the worker provide the services personally, as opposed to delegating tasks to someone else? (This indicates that you are interested in the methods employed, and not just results.)
  5. Do you hire, supervise, and pay the worker’s assistants? (Independent contractors hire and pay their own staff.)
  6. Is there an ongoing relationship between the worker and yourself? (A relationship can be considered ongoing if services are performed frequently, but irregularly.)
  7. Do you set the worker’s hours? (Independent contractors are masters of their own time.)
  8. Must the worker spend all of his or her time on your job? (Independent contractors choose when and where they will work.)
  9. Work done on premises. Must the individual work on your premises, or do you control the route or location where the work must be performed? (Answering no doesn’t by itself mean independent contractor status.)
  10. Do you have the right to determine the order in which services are performed? (This shows control over the worker)
  11. Must the worker give you reports accounting for his or her actions? (This may show lack of independence
  12. Do you pay the worker by hour, week, or month? (Independent contractors are generally paid by the job or commission, although by industry practice, some are paid by the hour.)
  13. Do you pay the worker’s business or travel costs? (This tends to show control.) 
  14. Do you provide the worker with equipment, tools, or materials? (Independent contractors generally supply the materials for the job and use their own tools and equipment.)
  15. Can you fire the worker? (An independent contractor can’t be fired without subjecting you to the risk of breach of contract lawsuit.)
  16. Can the worker quit at any time, without incurring liability? (An independent contractor has a legal obligation to complete the contract.) 

Answering "Yes"  to any of the following questions, means your worker is probably an Independent Contractor. Please keep in mind that even if your worker is classified as an Independent Contractor, in Illinois, a business owner is still required to provide workers compensation benefits unless the contractor has their own policy, or they have legally selected to be excluded from coverage as a sole proprietor, partner, or corporate officer. 

  1. Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? (This should involve real economic risk-not just the risk of not getting paid.)
  2. Does the worker have an investment in the equipment and facilities used to do the work? (The greater the investment, the more likely independent contractor status.)
  3. Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn’t conclusive since employees can also work for more than one employer.)
  4. Does the worker offer services to the general public?

 

Though these rules are intended only as a guide, the IRS says the importance of each factor depends on the individual circumstances, they should be helpful in determining whether you wield enough control to show an employer-employee relationship.

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