1099 Tax Software Blog

The IRS uses a 20 factor common-law test to determine whether a worker is an independent contractor or an employee, and offers Form SS-8 for employers or workers who need assistance with this determination. Studying a few example scenarios is also very helpful for worker status determination. The scenarios below outline some of the most common differences between independent contractors and employees.

Example 1 – John is asked to troubleshoot a law firm’s computer network. John’s IT support company and the law firm have a contract with a specific goal of fixing the networking system outlined. John brings one of his employees with him to work on the job. John uses his own tools, and while he works on the networking contract he also works on another IT support contract for a medical clinic. John is also allowed to pick his own schedule for the job.

John is an independent contractor in this example. If John was an employee he would not be allowed to subcontract his work to others. He would also be supplied with tools by the law firm and would not work for multiple clients. And he would not be able to choose his own schedule if he was an employee.

Example 2 – Mike is a mechanic who is paid a flat rate per job. He works specific hours on a regular schedule at the auto shop. The shop provides him with most of his tools, although he brought a few tools with him from his previous job. The auto shop is liable for any problems that may occur as the result of Mike’s work. Mike also works on several different vehicles and he does his work exactly as directed by his supervisor. Mike receives a paycheck every 2 weeks.

Mike is an employee of the auto shop. Mike is required to work as directed; he cannot perform work under his own terms. Although he is paid a flat rate per job, his employer is still required to withhold taxes from his paycheck and pay for his benefits.

Example 3 – Sarah is hired by a software company as a full-time sales representative. She must report to a sales manager twice per week and work 40 hours per week. She is free to perform her job duties with a less oversight than normal due to her past experience in sales. Her travel and business expenses are reimbursed by the software company, and she is provided with a company car. She is provided with paid training and with financial resources to help her achieve her sales goals, and she is paid a base salary plus commission.

Sarah is an employee of the software company. Although she has some freedom to do her work as she pleases, she only works for one company. This company provides her with everything she needs for her work and reimburses her travel expenses. She is also required to report to her manager regularly and she does not work for any other company.

Note: Sales representatives must be classified on a case by case basis, as each job is unique. In some of the cases where a sales representative is classified as an independent contractor, the IRS may still require Social Security, FUTA, and Medicare tax withholding if the worker meets all eight factors of the statutory employee test.

More information on this can be viewed on the IRS website: http://www.irs.gov/publications/p15a/ar02.html#en_US_2012_publink1000169473

by

Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

If you have any questions or comments about our software, feel free to contact us at any time.