Workers can be both employees and ICs, IRS rules
There are some things you just know: The sun will rise, Friday follows Thursday and if a worker is an employee, he or she can’t be an independent contractor (IC). Right? Well, you might want to double-check your calendar because at least one of these truths has just been discredited.
IRS recently came out with a Chief Counsel Ruling (IRS Info. Ltr. 01-0069) that says there are certain circumstances when a person can fill both employment roles at the same company – at the same time.
Here’s a rundown of the ruling and how you can keep your company in compliance.
Look at each position individually
In this instance, IRS received an inquiry as to whether it was possible for someone to work for a company in both capacities: an employee paid by Payroll and an independent contractor paid through Accounts Payable.
The Taxman ruled that that could in fact be the case. In very specific cases. When it is evaluating worker classification IRS reminds that it looks at the specific duties and behavior for each role that plays on its own.
So an individual could be working for your company in one department in a capacity that makes him an employee but also do work for another department in the capacity of an independent contractor.
Which means HR and Finance could have a lot more gray areas to navigate.
This situation may be getting increasingly common, especially as folks are looking to make extra money.
Here’s an idea of how this could play out. Perhaps one of your very own finance employees has a background in graphic design, so she helps Marketing with some new logo designs. While she’s on your payroll for her work in your department, you can cut her a check through A/P for the logo work because she’d be an independent contractor in that capacity.
Bottom line: Already being an employee isn’t an automatic knockout factor for independent contractor eligibility.
Of course, that goes both ways. Just because you have someone doing contract work for you that doesn’t mean that person couldn’t lop into employee territory if it starts doing work in another capacity for your company. (And you know IRS loves to find folks who should really be employees!)
No time like the present
This new ruling should have all companies stopping for a minute to take a look at the current worker classification calls they’ve made. Even if you don’t have any scenarios that fit this bill, it’s wise to make sure you’re confident in the decisions you’ve made (with the documentation to support them).
Both IRS and the Department of Labor have vowed increase enforcement of worker classification issues this year. So companies that have never received attention or scrutiny just may find themselves having to answer for their decisions.
3-factor review
Straight from IRS, here are the factors you need to consider:
- Behavioral: Does your company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by your company? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.), and
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
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