Recently, Internal Revenue Service (IRS) auditors targeted dealerships seeking to verify that outside contractors the dealerships hired weren't instead full-time employees. The audit was part of a government crackdown on employers who incorrectly classify workers as independent contractors to avoid paying payroll taxes and other employment-related expenses.
Both employers and the IRS sometimes struggle in determining who is an employee and who is an independent contractor. The determination is factual, and, if answered by the employer incorrectly in the eyes of the IRS, could result in significant taxes and penalties.
The IRS has a list of factors that it applies in determining whether a worker is an employee or an independent contractor.
1. Degree of Control. The dealer should not have the right to control the method or manner of the job to be performed.
2. Right to Discharge. The dealer cannot terminate the contractor as long as he or she meets his or her obligations under the contract.
3. Right to Delegate Work. The contractor can bring in whomever he or she wants to accomplish the purpose of the contract.
4. Hiring Practices. The contractor should have the right to hire and fire assistants that he or she uses to perform the contracted work.
5. Payment Practices. A contractor should be paid by the job, not by the hour, week or month.
6. Furnish Training. The dealer should not provide training for inexperienced contractors.
7. Skill. Contractors are generally viewed as skilled workers.
8. Duration of Relationship. The contractor should be hired for a specified time period; continuous work implies an employee relationship.
9. Control Over Hours of Work. A contractor should be able to set his or her own hours.
10. Independent Trade. The contractor should be free to work for any number of persons or firms simultaneously.
11. Furnishing of Tools. The contractor should be able to provide his or her own tools.
12. Place of Work. If possible, the contractor should perform the job off the dealer's premises.
13. Profit or Loss. The contractor should have the opportunity for profit or loss.
14. Intent of the Parties. The parties' intent to create a contractor relationship should be documented.
15. Principal in Business. The contractor should be a principal in his or her own business.
16. Sequence of Work. The contractor should be able to determine the sequence of the work performed outside of the dealer's control.
17. Reports Required. The contractor should not be required to submit regular oral or written reports or to attend dealer meetings.
18. Same Work as Regular Employees. The dealer should not have the contractor do the same type of work as its regular employees.
19. Integration. The dealer should not engage a contractor to do something that is a part of the day-to-day operations of the company.
20. Industry Customs. The industry should have a definite custom regarding worker classification.
There is not an exact number of factors that need to be satisfied in order to classify a worker as an employee and not an independent contractor. To protect your dealership from an assessment, review with your controller all dealership workers that are not paid through payroll to determine if they are misclassified.
