The IRS lumps several other factors under the rubric of relationship of the parties. What it’s basically looking for is how you and the worker perceive your relationship with one another. The IRS figures that if you and a worker intended to create an IC relationship instead of an employee relationship, you likely will not have the right to control the worker. The IRS can’t read your mind, so it looks for concrete evidence of your intent. We look at that issue more closely in this section.
a. Use of written IC agreements
A written agreement describing the worker as an IC is good evidence that you and the worker intended to create an IC relationship. A written IC agreement, by itself, can never make a worker an IC, but it can be particularly helpful in close cases. If the evidence is so evenly balanced that it is difficult or impossible for an IRS auditor to decide whether a worker is an IC or employee, the existence of a written IC agreement can tip the balance in favor of IC status. This makes it important to use these agreements.
b. Employee benefits
Providing a worker with employee-type benefits such as health insurance, sick leave, paid vacation leave or pension benefits is evidence that you intended to create an employment relationship.
c. IRS W-2 form
In the eyes of the IRS, filing an IRS W-2 form for a worker shows that you consider the worker to be an employee.
d. Duration of relationship
Employees are typically hired for an indefinite period; they continue to work as long as their employers need and/or want their services. For this reason, if you hire a worker with the expectation that the relationship will continue indefinitely, the IRS believes you probably intended to create an employment relationship.
However, the IRS recognizes that an IC can perform services for the same hiring firm for a long time. The relationship between a hiring firm and IC may be long term because:
- the IC has signed a long-term contract, or
- the IC’s contracts are regularly renewed by the hiring firm because the IC does a good job, prices his or her services reasonably or no one else is readily available to do the work. As long as your contract with an IC is not open-ended, it can last for as long as needed. Just make sure that each contract has a definite end date.
e. Performing key services
Another important factor for the IRS is whether the services a worker performs are key to the hiring firm’s regular business. The IRS figures that if the services an IC performs are vital to your regular business, you will be more likely to control how the IC does the job.
For example, a law firm is less likely to supervise and control a painter it hires to paint its offices than a paralegal it hires to work on its regular legal business. However, it is still possible for the paralegal to be classified as an IC. The IRS will examine all the facts and circumstances; this one factor alone does not make a worker an employee. A paralegal hired by a law firm could very well be an IC if, for example, he or she was a specialist hired to help with especially difficult or unusual legal work.
Factors That Are No Longer Important
Recognizing the changing nature of work in modern America, the IRS now de-emphasizes several factors that it used to consider crucial in determining worker status.
Working full time. It used to be considered the kiss of death for an IC to work full time for a client. IRS auditors saw this as very strong evidence of employee status. However, the IRS now recognizes that an independent contractor may work full time for one business either because other contracts are lacking, because this is the way time is allocated or because the contract requires exclusive effort.
Having multiple clients. The IRS used to view having multiple clients as strong evidence of IC status. Indeed, hiring firms would often encourage their ICs to work for others. It now says that having multiple clients is no longer useful evidence of IC status because many employees moonlight by working for a second employer.
Place of performance. Working on a hiring firm’s premises used to be regarded as important evidence of employee status. No longer. The IRS now says that where the work is performed is largely irrelevant. However, this factor is still important in many state audits. For example, in half the states, you may be considered an employer for unemployment compensation purposes if a worker works at your place of business or another place you designate.
Hours of work. The fact that a worker performed his or her services during hours the hiring firm chose used to be viewed as an indicator of employee status. Again, the IRS has changed its view. Some work must, by its nature, be performed at a specific time. On the other hand, the fact that a worker has flexible hours is not considered evidence of IC status because many employees now work flexible hours.
Right to fire, Right to quit. The IRS no longer views an unfettered right to quit or fire as strong evidence of an employee relationship.