Internal Revenue Service Warns: Designate Between Subs, Employees

by WOHe

Internal Revenue Service Warns: Designate Between Subs,

It’s easy for kitchen and bath specialists to get the lines
blurred between their own employees and independent contractors
especially with installers, plumbers, electricians and other

It can also potentially be very expensive.

In reality, business owners don’t really get to decide whether
or not a person on a job site is an employee; the Internal Revenue
Service makes that decision for them.

The following is a list of 20 questions the IRS uses to
determine if a worker is an independent contractor or an employee.
The answer of “yes” to any one of these questions (except #16) may
mean the worker is a company employee. 

1. Is the worker required to comply with instructions about
when, where and how the work is done? 
2. Is the worker provided training that would enable him/her to
perform a job in a particular method or manner? 
3. Are the services provided by the worker an integral part of the
business’ operations? 
4. Must the services be rendered personally? 
5. Does the business hire, supervise or pay assistants to help the
worker on the job? 
6. Is there a continuing relationship between the worker and the
person for whom the services are performed?
7. Does the recipient of the services set the work
8. Is the worker required to devote his/her full time to the person
he/she performs services for? 
9. Is the work performed at the place of business of the company or
at specific places set by the firm? 
10. Does the recipient of the services direct the sequence in which
the work must be done? 
11. Are regular oral or written reports required to be submitted by
the worker? 
12. Is payment made hourly, weekly or monthly (as opposed to by
commission or by the job?) 
13. Are business and/or traveling expenses reimbursed? 
14. Does the company furnish tools and materials used by the
15. Has the worker failed to invest in equipment or facilities used
to provide the services? 
16. Does the arrangement put the person in a position of realizing
either a profit or loss on the work? 
17. Does the worker perform services exclusively for the company
rather than working for a number of companies at the same
18. Does the worker in fact make his/her services regularly
available to the general public? 
19. Is the worker subject to dismissal for reasons other than
non-performance of the contract specifications? 
20. Can the worker terminate his/her relationship without incurring
a liability for failure to complete the job? 

The consequences of being caught and having an independent
contractor reclassified as an employee can be very expensive. If
caught, the employer becomes responsible for both the employer’s
and employees’ FICA (15.3% of gross wages) and FUTA (currently $56
per year per employee), as well as the federal income tax (20% of
gross wages). 

The IRS may also bring in the state and, as a result, the
employer may also become liable for the state income tax, as well
as state unemployment and worker’s compensation. Employers may also
face a penalty equal to the amount of the back taxes owed.
Likewise, the employer will owe interest on all back taxes from the
due dates. 

And, if the contractor is determined to be an employee because a
dispute over workman’s compensation or a job site injury brings it
to the IRS’ attention, the business may be required to support the
injured person for the rest of his or her life. 

To qualify a person as an independent contractor under Section
503 of the 1978 Revenue Act, the following three requirements must
be met: 

  • You must file 1099 miscellaneous income forms (if you pay them
    over $600). 

  • Similar workers must be treated alike (not treated as

  • There must be a good reason for the contractor status. 

According to the IRS, workers are employees if they must comply
with the employer’s instructions about their work, receive training
or direction from the employer, or provide services that integrate
into the employer’s business. They are employees if they render
their services personally (can’t subcontract), have a continuing
working relationship with the employer, must follow set hours of
work, work full time for the employer, and perform the work at your
job site.

They are also considered employees if they regularly report to
you; if they are paid regularly (weekly, for example); if they are
paid for business expenses; if they use your tools and/or
materials; if they lack a major investment of their own in
facilities used to perform services; if they cannot make a profit
or suffer a loss from their services; if they work only for you; if
they do not offer their services independently to the public; if
they can be fired by you, and if they can quit work and not incur a

To qualify as an independent contractor, the opposite of all of
these would be true. But remember, the IRS selects the questions
and grades the answers.

If a question arises as to whether or not a person is an
independent contractor or employee, the following may help convince
the IRS that the person is truly an independent

  • The business should have the person sign a written agreement
    attesting to the fact that he/she is an independent

  • The person should actually bill the business for the services

  • The person should be required to have his or her own worker’s
    compensation coverage. 

  • As much independence as possible should be given in areas such
    as hours worked, where the job is to be performed, and the

  • The person should provide his or her own tools, should supply
    training, and should provide transportation to and from the job

The ultimate safeguard for a business is to complete a Form SS-8
that asks the IRS for a determination if the person is an employee.
For more information, go to, where you can
download IRS Publication 937 for free.

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