ICs are people who are in business for themselves. Sometimes it’s very easy to tell if workers are in business for themselves. This means it’s easy to tell whether they are independent contractors.
EXAMPLE: You start a restaurant and contract with IBM to install a computer system for your business. There is no way IBM will be viewed as your employee. You need not worry about paying employment taxes for IBM’s workers. That’s IBM’s problem. IBM is clearly an established independent business. Not even the most hard-nosed IRS auditor would question this.
EXAMPLE: You hire several people to wait tables in your restaurant and pay them salaries, benefits and so forth. It is clear that a typical waitperson in a restaurant is not in business for himself. He is an employee of the restaurant. The restaurant owner—that is, you—are the one in business.
In cases like these, it’s so clear that the worker is—or is not—in a separate business that there really is no need to apply any specific legal test to determine the worker’s status. In many other cases, however, the issue is not quite so clear. Things can be especially foggy when workers perform specialized services by themselves—that is, without the help of assistants.
EXAMPLE: Instead of hiring IBM, you hire a computer consultant named Mike to install your computers. Mike has no employees and performs all the work for you personally. He ends up spending several months working on your computers. It’s difficult to say for sure that Mike was in business for himself while he worked for you.
It may be helpful to view every worker in America as being somewhere in a continuum. At one end are workers who are clearly employees; at the other end are those who are clearly ICs. But in between these two extremes, there is a vast middle ground where work relationships have some elements of employment and some elements of independence. It is where workers fall into this uncertain middle ground that problems with the IRS, state tax authorities, unemployment compensation authorities and other agencies can develop.
It’s to deal with cases falling within this middle ground that the courts and agencies have developed detailed legal tests to determine worker status. The purpose of these tests is to give both hiring firms and government agencies some objective and understandable basis for classifying workers. Unfortunately, these tests often do not provide a clear answer about how to classify a worker.
The common law test is the legal test most frequently used to determine worker status. It is also called the right of control test. This is the test used by:
- the IRS
- unemployment compensation insurance agencies in many states
- workers’ compensation insurance agencies in many states , and
- courts, to determine copyright ownership disputes (see Chapter 10 for more information about intellectual property issues).
Other Tests for IC Status
The common law test isn’t the only test used to determine worker status. Two other types of tests are used by some government agencies:
- The Economic Reality Test: Under this test, workers are employees if they are economically dependent upon the businesses for which they render services. Economic dependence equals an employment relationship.
- ABC Test: About half the states use a special statutory test, also called the ABC test, to determine if workers are ICs or employees for purposes of unemployment compensation. This test focuses on just a few factors.