Here’s the question for today’s thought experiment: Does working for the IRS become a self-fulfilling prophecy?
Every day you go into work knowing that much of the country despises the agency for which you work. And unless you’re a sadist or have a particular zeal for schadenfreude (which is a typically dour German word that describes the act of taking joy from the misery of others), it’s probably difficult to be passionate for your job or have the sense that you’re making the world a better place. To compound matters, you’re also surrounded by coworkers who feel similarly put upon.
And the weight of the job doesn’t end once you pull out of the parking lot. Your neighbors may act guarded and suspicious around you, especially during tax season. You’re also probably not at the top of any party invite lists, and to the extent people do reach out to you, they often may be looking for free tax advice, or are acting out of the mistaken belief that buddying up to you can protect them from an audit.
And even though, in your heart of hearts, you know you’re a good person, over time wouldn’t it be difficult to avoid become the boogeyman everyone expects you to be?
Well, that’s certainly an existential bummer of an introduction. I bet you didn’t wake up today thinking, “Gosh, I should feel sorry for the taxman today.” Perhaps we should all rush out and give a great big hug to the first IRS employee we can find…no, no, on second thought, let’s not do that, as it would probably increase the likelihood of an audit, and might lead us to being arrested on assault charges (after all, who among us would appreciate a bear hug from a half-crazed stranger?).
So, knowing that life’s only two certainties are death and taxes, let’s turn our attention to how the IRS determines independent contractor status.
I’ve previously explored the independent contractor tests for work comp and wage and hour purposes. Not surprisingly, the IRS has its own test, as do the various state departments of revenue. However, I’ll limit my analysis to the IRS test.
Previously, the IRS used to apply a 20-factor test to determine whether or not an individual could be classified as an independent contractor. A number of years ago they moved to what they call a “common-law” test that focuses on the degree of control the business exercises in achieving its purposes versus the degree of independence the worker has to actually perform the tasks themselves.
As described in IRS Publication 15-A, the IRS will closely examine each of the following three areas: “behavioral control, financial control, and the type of relationship of the parties.” Let’s take a look at each.
In exploring this factor, the IRS examines the degree to which the business has the right to “direct and control” how the worker actually performs the task(s) the worker has been retained to perform. In making that evaluation, the IRS will examine the following:
Keep in mind that a true independent contractor is, for all intents and purposes, a separate, stand-alone business. In turn, the IRS will explore how much the financial aspects of the worker’s business operate or look like those of other businesses, and will do so by examining:
This area of inquiry focuses on determining how truly distinct the business’s interests are from those of the worker and include an exploration of the following:
Failing one or more of the inquiries listed in the previous sections (for instance, not having a signed agreement, or paying the worker on an hourly basis) does not automatically mean that a worker fails the independent contractor test, since the IRS will look at the whole forest, and won’t usually focus on just one or two trees.
However, in evaluating your risk, you would be wise to be concerned if you fall short in any of the areas of examination. It is also worth noting that you will rarely be legally harmed by treating a worker as an employee, even though he or she could arguably be classified as an independent contractor. Therefore, when in doubt, erring on the side of employment status is probably the best way to go.
This becomes all the more true when you consider what the consequences of misclassification can be. Not only will you pay back taxes you would have owed, but you can be assessed additional penalties, as well, including potentially paying the full employee amounts of any income taxes and FICA that should have been withheld over the course of the relationship.
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James provides guidance to employers on a variety of topics with a focus on employment, risk management and liability issues.
James provides guidance to employers on a variety of topics with a focus on employment, risk management and liability issues. In addition to working directly with employers, he regularly conducts in-depth training through webinars, at client sites, and through the University of Minnesota’s Continuing Ed program. He previously was a plaintiff’s attorney and brings that perspective into his advice to employers. James received his law degree from the University of Minnesota and his BA from Washington University in St. Louis.
A recent survey by the Society for Human Resources Management (SHRM) reported 94% of leaders feel employee engagement is an important or very important workforce challenge. An engaged workforce increases operational income by over 19%, while a disengaged workforce can drain over 34% of an organizations’ operational income. Additional risks of low engagement can be seen in increased turnover, low customer satisfaction ratings and even increased employment litigation.
During the White House’s Summit on Working Families on June 24, 2014, President Obama indicated he was signing a presidential memorandum requiring every federal agency to address flexible work schedules and give employees the right to request such schedules. Absent what could be a dramatic increase in workplace flexibility for federal employees, it is undeniable that the demand for flexibility and work-life balance is on the rise.
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