Tax & Business Insights

Independent ? Contractors

Volume 13 Issue 5 --  September/October 2001

The question mark placed in the middle of the title, above, connotes the potential contradictions of the designation, Independent Contractor (IK).  Many services, such as computer programming, information technology, siding installation, concrete finishing, and carpentry are provided by workers who are IKs, not employees.  Some workers are truly independent and there is no question about their status, but how is this independence established?

The degree of independence of IKs can vary wildly.  Even long before the current IRS 940-941 tax reporting regime, the question of “who is an Independent Contractor,” was an important issue.  Why?

Let’s assume that Snerdly is recklessly driving a beer wagon, delivering beer from your brewery to market, when a keg rolls off the wagon and kills Effie.  When Effie’s relatives sue your brewery, your defense may be that Snerdly was an IK and you, the beer manufacturer, are certainly not responsible for his careless horsemanship.

Some of the same basic issues which arose when horses delivered beer still apply today.  For example, did Snerdly wear a uniform?  Did he own his horses and wagon?  Did he have the freedom to deliver the beer when he wanted to?  Assuming Snerdly was essentially controlled like other workers at the brewery, the probabilities are that a judge or jury will treat Snerdly as an employee. Stated differently, Effie’s family’s lawsuit against the brewery might be successful if it can be established that Snerdly was an employee and that he was not acting responsibly. 

The Essential Factor is Control

If the principal of the business controls the provider of the service to a sufficient degree, then the status of the worker will be that of an employee as opposed to an IK.  The Federal Express or UPS delivery person who delivers packages from your business is not your employee even though an important service, package delivery, is performed.

Many principals prefer to retain the services of IKs, instead of employees, and pay them a lump sum, without the necessity of filing withholding tax returns and other reports concerning the amounts paid.  In addition to reduced paperwork, an IK should require no, or little, supervision, have their own tools and equipment, and generally be free to accomplish the work objective as they see fit.

Twenty Questions

To address the sorting out of these factual issues regarding control, the IRS developed a list of twenty questions which have been in existence for some time.  See Rev. Rul. 87-41, 1987-1 C.B. 296.  Even the IRS admits that its list of twenty questions may not be controlling and that the response to any one, or several, of the questions does not by itself make a service provider an employee. 

Courts have addressed the factual morass of control in many ways and there are cases on both sides of the issue regarding each of the factual avenues which may apply.  Cases involving the status of individuals as independent contractors or employees almost universally state that the facts are controlling and that nearly every case is factually unique. 

Other Considerations

Whereas retaining an IK to perform certain services may have its advantages, there are other considerations.  If an alleged IK is not engaged for future assignments, he might apply for Worker’s Compensation, as an alleged employee.  If a state agency or tribunal decides that an individual is, in fact, an employee, the claimant will become eligible for Worker’s Compensation.  But that is not the end of the issue. 

Such a determination may well be controlling for Federal tax purposes, in which case the reluctant employer will be responsible for federal and state withholdings, FICA, FUTA and other similar taxes.

In our next issue, we will explore the steps a business owner can take to establish the desired status of a worker.

Copyright 2001
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