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This section examines IRS rulings, court decisions and IRS guidelines that give detailed guidance on how to classify particular workers in nine occupations:

• architects
• attorneys
• beauty salon and barbershop workers
• limousine drivers
• van operators
• taxi drivers
• television commercial and professional video workers
• truck drivers, and
• companion sitters.

Following these guidelines will give you persuasive ammunition if the IRS ever decides to audit your business and to question how you’ve classified your workers.

Tip  Useful for Safe Harbor Protection

Using this information may also help qualify your business for Safe Harbor protection should the need ever arise.

a. Architects

An architect who performs services for a variety of clients and who assumes professional liability for his or her work product will almost certainly be viewed as an IC by the IRS.

However, the IRS has ruled that an ostensibly independent architect could be classified as an employee when circumstantial evidence suggests that the architect is a de facto employee, such as when an architectural firm gives the architect an office, staff support, expense accounts and instruction on how the project is to be completed. In other words, the firm might be calling the architect an IC, but treating the architect just like an employee.

Therefore, firms using self-employed architects need to be very careful. It’s best that the architect performs his or her services from an outside office without any supervision by the firm. The firm’s control over the architect should be limited to accepting or rejecting the architect’s final work product.

Tip  Draftspeople Treated Differently

Licensed architects are not the only people who work in the architectural design field. For example, there are also thousands of architectural draftspeople. The IRS generally classifies such workers as employees. These workers are relatively low-skilled and unlicensed. As you may recall, the IRS is more likely to classify low-skill workers as employees because companies generally supervise and direct their work.

b. Attorneys

A lawyer who holds himself or herself out to the public and who is hired by a company or individual to litigate or defend a particular lawsuit is an IC. This remains true even when the lawyer spends most or all of his or her time on the case. And this rule applies even where a lawyer who has a variety of clients is paid an annual retainer to defend any suit brought against the client.

There is a different, rule, however, for attorneys who work as associates in law firms. The IRS will deem an attorney to be an employee of a law firm when the law firm pays the attorney a salary, provides the attorney with office space and secretarial help and requires the attorney to work a specified number of hours. This is so even if the firm allows the associate to retain all the fees the firm earns from some of its cases.

In-house corporate counsel—lawyers who work full-time representing a single company and who do not offer their services to the public—are almost always company employees and are ordinarily classified as such.

Contract attorneys are lawyers hired by law firms to help out on a per project basis. Some contract attorneys are hired through employment agencies and others are hired directly. Unlike associates, they are not considered members of the firm. Whether they should be classified as ICs or employees depends on how they are treated on the job.

c. Beauty salon and barber shop workers

Beauty salons and barbershops are often staffed by ICs. The owner of the shop will typically rent or lease a chair or booth to a barber, beautician, hair stylist or manicurist—and all of these people can be considered ICs by the IRS in the right circumstances. When deciding whether to classify these people as ICs or as employees, the IRS is predominantly interested in how these workers are paid . The IRS has a list of questions that it generally asks the owners of barber shops and beauty shops when it is trying to determine whether a worker is an employee or independent contractor. These questions can be quite instructive for shop owners who want to ensure that they establish IC relationships with their workers:

• How does the worker pay the shop owner for the space he or she uses? Workers who pay a flat fee rather than a percentage of their earnings are usually found to be ICs by the IRS because this shows they have a risk of loss.
• How much is the weekly/monthly rate? The higher the rate, the greater the risk of loss and the more likely the worker is an IC.
• Does the worker rent a particular space? In the case of a barber or hair stylist, renting a particular space—as opposed to simply working anywhere the shopkeeper wants—indicates IC status because it shows that the owner does not control where the worker does his or her work.
• Who is responsible for damage to the chair? If the barber or stylist is responsible, he or she will have a greater risk of loss, which will indicate IC status.
• Who maintains the worker’s appointment article? The worker should maintain his or her own article. If the owner maintains the article, it shows control over the worker and indicates employee status.
• Who collects the money earned by the worker? If the worker collects the money he or she earns, this will indicate IC status.
• Who pays for the worker’s supplies? Generally, if a worker pays for his or her own supplies, this fact will indicate IC status.
• Who maintains the articles and records of the individual? If the worker maintains his or her own articles and records, this fact will point to IC status.
• How are assistants compensated? ICs pay for their own assistants; shop owners pay for assistants for their employees.

To ensure that the IRS classifies a worker as an IC, the shop owner should not supervise or otherwise control the worker. However, the shop can require the worker to comply with some basic work rules, including the following:

• maintaining a clean work area
• maintaining his or her own tools, and
• providing and maintaining his or her own uniforms.

In most states, barbers and beauticians must also have a license. If they are not licensed, these workers will look more like employees to the IRS.

The following examples, which are taken from IRS Publication 15, Employer’s Tax Guide, illustrate the IRS’s views on classifying these types of workers:

EXAMPLE: Paul is a barber. He signed a lease agreement with Larry, the owner of a barber shop, to use a chair in Larry’s shop. Larry bears all the shop expenses, including rent, utilities, advertising, linens and other supplies. Paul keeps 70% of the receipts from his chair, and Larry keeps 30%. Paul puts all receipts in Larry’s cash register. At the end of the week, Larry pays Paul the agreed percentage of the receipts. Paul must comply with the shop hours that Larry has posted on the shop door. Paul must take customers in turn, maintain clean premises, use clean towels and sterile equipment and keep a clean personal appearance. Larry’s income depends on a percentage of Paul’s receipts. Larry retains the right to direct and control Paul to protect his investment and to be assured sufficient profit from the shop. Paul has no investment in the shop, assumes no liability for its operation and furnishes nothing except his personal services. Is Paul Larry’s employee?

Yes. Virtually every factor in this example weighs against Paul being an IC and in favor of Paul being an employee. Paul has no risk of loss because he has no investment in the shop and because Larry pays all the expenses. The fact that Larry keeps all the receipts in his cash register and pays Larry a percentage at the end of the week also shows that Paul is an employee—having control over all the money gives Larry the right to control Paul. Larry’s control over Paul is also made evident by the fact that Paul must work set hours. All these factors that demonstrate Larry’s control over Paul are consistent only with a finding of employee status by the IRS.

EXAMPLE: Charlie, the owner of a barber shop, and Sally, a professional manicurist, have an agreement under which Sally provides manicuring services to shop patrons during business hours. According to the agreement, Sally regulates her own hours, furnishes her own equipment and keeps the proceeds from her work. She does not use the shop cash register nor does she report her earnings to Charlie. She sometimes hires a substitute to fill in for her when she doesn’t want to work. Charlie cannot direct the way she performs her services. Either of them can end the agreement at any time. Although Charlie has the right to dismiss Sally by ending the agreement, and although he furnishes her a place to work, he does not have the right to direct and control her work. Is Sally an employee of Charlie’s?

No. Sally is self-employed. The fact that Sally pays a fixed monthly fee for the booth, sets her own hours and is free to select her own customers are important factors pointing to her IC status. These all show that Charlie does not control how Sally performs her services. Sally also has a risk of loss.

d. Limousine drivers

The IRS uses a three-prong test to determine whether limousine drivers are employees or ICs.  Each prong must be satisfied for a limousine driver to be classified as an IC under the IRS guidelines:

• Has the driver made an investment in the limousine, either by owning it or leasing it? Drivers who do not make such investments are employees.
• Does the driver have a financial stake in the limousine’s profit or loss potential? Drivers without such a risk of loss are employees.
• Does the limousine company have the right to control the driver on the job? If so, the driver is an employee.

CD-ROM/Document  Each of these prongs requires a rather detailed analysis. You can find a complete copy of the IRS guidelines on how to classify limousine drivers on the CD-ROM that is included with the article. You can also obtain a copy directly from the IRS by calling 800-TAX-FORM (800-829-3676) or by downloading a copy from the IRS website at www.irs.gov.

e. Van operators

A van operator is the driver of a vehicle that transports household goods such as furniture and other belongings. The IRS guidelines discussed here cover only those van operators who work under a written agreement with a carrier or agent and who own their own trucks or truck tractors.

To determine if a van operator is an IC or employee, the IRS examines several different areas of the relationship between the van company and the operator. Those areas include:

• the operator’s financial investment in his or her equipment, either through ownership or lease (this is the most important factor)
• evidence of the operator’s potential for profit and loss, including expenses, compensation and the financial burden of hiring his or her own assistants
• who determines the operator’s work schedule and manner of performance, and
• other factors that distinguish an IC from an employee, such as training, independent decision-making and termination issues.

CD-ROM/Document  You can find a complete copy of the IRS guidelines on how to classify van operators on the CD-ROM that is included with the article. You can also obtain a copy directly from the IRS by calling 800-TAX-FORM (800-829-3676) or by downloading a copy from the IRS website at www.irs.gov.

f. Taxi drivers

Some taxi drivers rent company-owned vehicles while others own their own and contract with a taxi company only to use the company’s dispatch services. The IRS takes the position that regardless of whether the driver owns or leases the taxi, he or she is an employee of the company if the driver must pay the company a percentage of the fares he or she earns. The rationale for this view is that in order to determine how much money it’s owed, the taxi company must conduct an accounting of all the fares collected by the driver during the shift. The IRS asserts that this right to an accounting means that the taxi company has the right to control the driver and that the driver is therefore the company’s employee.

On the other hand, taxi drivers who pay a taxi company a fixed amount—rather than a percentage of their earnings—can be ICs. This is because there is no accounting by the taxi company of the fares the driver receives when the driver pays the company a fixed fee. This is so both for drivers who own their taxis and those who lease them from the taxi company.

However, the IRS will classify as employees even those drivers who pay a fixed fee if other factors indicate that the company controls the driver—for example, the company requires the driver to accept all company dispatch orders.

In addition, the IRS will classify as employees taxi drivers who work for companies that use a voucher system to bill their customers.

Hollywood Fares

You might get your big break in show biz before you spot a taxi in Los Angeles. Nonetheless, Uncle Sam still wants to know who’s really calling the shots between the drivers and dispatchers in LA. An IRS audit of more than 650 taxi drivers concluded that most were employees, even where they paid the taxi company a fixed fee. The rationale was that the taxi companies required their drivers to follow various rules and regulations—all of which showed that the companies controlled the drivers. For instance, drivers could not refuse dispatch orders from the company without suffering adverse consequences. Also, the company had the right to discharge the drivers at any time. And the cars all had to be painted in the company colors. Finally, all of the drivers were included in the company’s property damage insurance policy. Whether any of the drivers could play Hamlet was left undecided.

g. Television commercials and professional video production

The IRS has issued extensive guidelines on how to classify workers engaged in creating television commercials and in professional video production. When the IRS uses the term professional video production, it means video productions not intended for television viewing, including corporate video productions typically used for training, employee communications, sales and marketing, public service and public relations.

The IRS has also created a two-step test to determine whether the workers in this field are ICs or employees. In the first step, the IRS looks at whether the production company gives the worker preferential hiring treatment, training or makes payments to the worker’s guild or union on his or her behalf. If any one of those elements is present, the worker is classified as an employee and the test is ended. If all three are absent, the IRS goes on to the second step to determine the worker’s status. In the second step, the IRS determines where the worker fits into a hierarchy.

CD-ROM/Document  You can find a complete copy of the IRS guidelines on how to classify workers engaged in creating television commercials and in professional video production on the CD-ROM that is included with the article. You can also obtain a copy directly from the IRS by calling 800-TAX-FORM (800-829-3676) or by downloading a copy from the IRS website at www.irs.gov.

h. Truck drivers

Although some trucking companies hire employees to drive company trucks and trailers, most trucking companies use ICs. The trucking industry uses several different types of ICs, including:

• Owner-operators, who are people who own and operate their own trucks, including tractor-trailers or bobtails.
• Subhaulers, who are people or companies that own and operate a single tractor-trailer or a fleet of tractor-trailers that are then leased to prime carriers. Subhaulers are paid a percentage of the freight bill prepared by the prime carrier.
• Pothaulers, who are a subclass of owner-operators. Pothaulers are owner-operators who pick up full sealed containers from the harbor and transport them to the terminal of the prime carrier or break-bulk agent. Pothaulers are usually paid a flat rate for each container hauled.

Diapers and Bananas and Taxes, Oh My!

The IRS automatically classifies some truck drivers as employees for employment tax purposes. These include drivers of certain commodities, such as meat and vegetable products, fruit, bakery products, beverages; or laundry or dry cleaning services.

The single most important factor in determining whether a truck driver is an IC or an employee is truck ownership. A trucker who owns or leases his or her own truck may be an IC, but a trucker who uses a company truck will almost always be found to be an employee, even if there are other factors that indicate IC status.

If a truck driver wants to be an IC, it’s always best for the driver to buy or lease the truck from someone other than the person or company for whom the driver works. Otherwise, the IRS will analyze the sale or lease very carefully to make sure it isn’t a sham designed to help make the driver look like an IC when the driver is really more like an employee. IRS examiners will review the details carefully—especially the title and sale/lease documents. The driver must pay a commercially reasonable purchase or lease price based on the fair market value of the vehicle and must be personally liable for the payments. If the driver financed the purchase, the driver must pay a reasonable interest rate. If the driver leased the vehicle, the lease should usually be for a minimum of one year. A purchase or lease price is reasonable if it is comparable to prices other companies would charge.

In addition to examining the truck ownership, the IRS will also ask whether the driver:

• pays business and traveling expenses
• receives compensation based on a percentage of revenue or miles driven rather than a fixed salary
• hires and pays assistants, drivers and mechanics
• pays his or her own license fees and road taxes
• maintains his or her own truck storage and maintenance facility or business office
• sets his or her own work schedule
• determines the manner of performing the work
• has a choice to accept or reject jobs
• may delegate services to another driver, and
• works for more than one firm at a time.

Doing the above tasks indicates IC status; not doing them indicates employee status. The following example, taken from IRS Publication 15, Employer’s Tax Guide , illustrates how the IRS classifies truck drivers.

EXAMPLE: A company engages Phil Blue to haul produce to its customers. The company has legal ownership and control of the trucking equipment. The company can require Phil (on an hour’s notice) to make deliveries at specific times and specific places. If Phil refuses, he will jeopardize his relationship with the company. He has to operate and maintain the equipment and provide the necessary operators and helpers. He is not allowed to use the company’s equipment to haul for others. He is paid on a tonnage basis and is not guaranteed a minimum amount of compensation. He has to pay the operators and helpers out of his tonnage receipts as well as pay for all the insurance coverage required by the company. Is Phil an employee of the company?

Yes, but it’s a close call. There is a mix of IC and employee factors in this IRS example. The fact that Phil is paid on a tonnage basis and not guaranteed any minimum compensation is on the IC side of the ledger. So is the fact that Phil must personally pay for helpers and all insurance coverage and maintain the vehicles. However, all the other factors indicate employee status. Most importantly, the company owns the truck. The company also exercises substantial control over Phil. He is not allowed to use the company truck to haul for others, and he must accept all assignments offered by the company. The fact that Phil must make deliveries at times and places specified by the company would seem to be a neutral factor—obviously, produce must be delivered according to a certain time schedule.

i. Companion sitters

Companion sitters are people who serve as companions for the sick and elderly. Typically, a companion sitter will find employment through a specialized placement service, rather than hiring the sitter directly.

A special employment tax law provision provides that sitters are not employees of the placement service if the service does not pay them wages—that is, if the companion sitter is paid directly by the person or business whom they are sitting for.

The relationship of the companion sitter to the client is a little more complicated. To sort it out, use the IRS common law test. Under this test, a sitter would be a client’s employee if the client has the right to control how the sitter performs the companion sitting services. It seems likely the right of control would be present in most companion sitting situations, except, perhaps, where the client is so ill or elderly he or she doesn’t have the physical capacity to exercise any control over the sitter.

Companion sitters who perform their services at the client’s home are considered household workers for federal payroll tax purposes.