In the United States, most workers are common law employees. They provide services under the direction and control of their employer, and are paid wages for their labors. However, some workers are independent contractors. They are not under the control (or are under limited control) of the person for whom they provide services.
Many people categorized for tax purposes as independent contractors are actually common law employees, and are entitled to the benefits (and complications) of that status. This field has been ripe for audits and litigation with the IRS, and continues to be an area that is anything but clear. The issue continues to be the focus of efforts to deal with leased employees. (See Chapter 4.)
This chapter will discuss the various factors that indicate a worker is an employee, and differentiate employees from independent contractors. It will discuss strategies for dealing with potentially troublesome cases. It will also look at the problems associated with including independent contractors in qualified plans.
 | Q 2:1 Who is a common law employee? |
| Q 2:2 Why are they called “common law employees”? |
| Q 2:3 Other than qualified plans, what are the tax differences of being an employee or an independent contractor? |
| Q 2:4 How do we tell if someone is an employee or an independent contractor? |
| Q 2:5 What do the regulations tell us about employee status? |
| Q 2:6 What is the Twenty Factor Test? |
| Q 2:7 What issues are covered in the Twenty Factor Test of Rev. Rul. 87-41? |
| Q 2:8 What is the current relevance of the Twenty Factor Test? |
| Q 2:9 How have courts ruled on this issue? |
| Q 2:10 Why did the IRS issue the payroll tax Audit Guidelines? |
| Q 2:11 What is the effect of the Audit Guidelines? |
| Q 2:12 What factors are considered under the Audit Guidelines? |
| Q 2:13 What is involved in behavioral control? |
| Q 2:13 What is involved in behavioral control? |
| Q 2:15 How does training affect behavioral control? |
| Q 2:16 How do evaluation systems show behavioral control? |
| Q 2:17 What is involved in financial control? |
| Q 2:18 What is a significant worker investment and how does it affect financial control? |
| Q 2:19 How do unreimbursed expenses affect financial control? |
| Q 2:20 How do advertising and the availability of the worker’s services to others affect financial control? |
| Q 2:21 How does the method of payment affect financial control? |
| Q 2:22 How does the ability to realize a profit or loss affect financial control? |
| Q 2:23 How does the relationship of the parties help determine employee status? |
| Q 2:24 How does an independent contractor agreement show the relationship of the parties? |
| Q 2:25 What other documents show the intent of the parties? |
| Q 2:26 How do employee benefits show the intent of the parties? |
| Q 2:27 How do discharge procedures show the relationship of the parties? |
| Q 2:28 How does the permanence of the relationship affect worker status? |
| Q 2:29 How does the nature of the services relate to the relationship of the parties? |
| Q 2:30 Are there items from the Twenty Factor Test that are no longer relevant or useful? |
| Q 2:31 How do the audit guidelines compare with the Twenty Factor Test? |
| Q 2:32 Do the Audit Guidelines consider industry practice or custom in evaluating whether a worker is an employee? |
| Q 2:33 Do labor law determinations indicate employee status? |
| Q 2:34 How does the existence of a separate corporation that nominally employs the worker affect determination of the worker’s status? |
| Q 2:35 Is a corporate director an employee or an independent contractor? |
| Q 2:36 Can a worker simultaneously be a common law employee and an independent contractor with respect to the same employer? |
| Q 2:37 Are doctors, lawyers, and other professionals subject to different rules in determining whether they are employees? |
| Q 2:38 What are the potential problems of misclassifying a worker? |
| Q 2:39 What is the Microsoft decision? |
| Q 2:40 What do we learn from the Microsoft decision? |
| Q 2:41 Are you sure I cannot cover independent contractors under a qualified plan? |
| Q 2:42 How can Section 530 relief help an employer? |
| Q 2:43 Can IRS correction procedures be used to deal with classification mistakes? |
| Q 2:44 What steps can an employer take to minimize the risk that it misclassifies workers? |
| Q 2:45 How can an employer reduce the costs of misclassifying workers? |
| Q 2:46 How does the IRS regard exclusionary clauses, such as the one in Q 2:45? |
| Q 2:47 How does the Department of Labor view an exclusionary clause? |