Who counts as an employee versus an independent contractor may be about to change. A DOL proposal suggests revamping employee classification, reclassifying workers who are economically dependent on a company as employees entitled to more benefits and legal protections.
The DOL has received 12,469 comments on the proposed rule, so the agency may not issue a final rule for a while. But while it’s deciding, the IRS is keeping its stark distinction. You don’t generally have to withhold or pay any taxes on payments to independent contractors, as you do with employees. The Employment Tax Examination Program is a guide the IRS uses as a parameter to examine employers that have a high risk of misclassifying employees.
If you’re a business owner hiring or contracting with other individuals to provide services, consider the following questions, which the IRS currently asks when classifying employees:
- What degree of control and independence is there in the contractual arrangement? Does your company control or have the right to control what the worker does and how the worker does his or her job?
- Do you control the business aspects of the worker’s job? This includes considerations such as how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
- Are there written contracts or employee benefits, such as a pension plan and vacation pay, and will the relationship continue? Is the work performed a key aspect of the business?
You need to weigh all factors when determining whether a worker is an independent contractor. The key is to look at your entire relationship and decide the degree or extent of your right to direct and control how he or she works. Document each factor used in coming up with your determination.
The proposed rule will likely consider economic factors that accumulate in an investment of work, including scheduling, supervision, price-setting and the ability to work for other employers, asking whether the work is integral to the employer’s business. The new rule may align with the rise of the gig economy and a class of worker who effectively works full time for a company but is still considered an independent contractor. The DOL’s proposed rule could change that, availing these workers of benefits and labor protections under federal law.
The lengthy proposed rule — still a work in progress — is available on the DOL website. In brief, the rule stresses six characteristics the DOL may use in making a determination:
- Opportunity for profit or loss depending on managerial skill
- Investments by the worker and the employer
- Degree of permanence of the work relationship
- Nature and degree of control
- Extent to which the work performed is an integral part of the employer’s business.
- Skill and initiative.
If you want to be sure you’re following the IRS’s current definitions, you can get an official ruling via Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will review the facts and circumstances and officially determine the worker’s status. It can take up to six months to get an answer, but you’ll feel confident in the determination.
Meanwhile, consult with counsel to make sure not to misclassify an employee. And keep an eye on future changes — we’ll have further communications if and when the rule becomes final.