Worker Classification: Financial Control and Relationship

The past few weeks we’ve been discussing the classification of employees versus independent contractors, and the factors considered by the IRS. This week we look at financial control and the type of relationship. Watch the video to learn more!

Transcript:

Over the last couple of weeks, we’ve been talking about independent contractors and employees, the differences, the consequences for not getting that correct, as far as the IRS is concerned, and tax implications, things along those lines. Last week we talked about one of the three major groups or categories of factors that the IRS considers, and if you remember there are three, it’s behavioral control, financial control, and then the type of relationship. Last week, we talked a lot about behavioral control, because that’s really an important one, as you begin to look at everything, and they kind of all intertwine a little bit with each other anyway, and remember, they’re all factors, so no one is going to be necessarily indicative and make it to where you know the person you’re talking about is an independent contractor or an employee. It’s when you look at everything together. The preponderance of the evidence, if you will, is really what’s taken into consideration. So last week we talked about behavioral control. This week, we’re going to talk about the other two financial control and types of relationships, or the type of relationship, and what are the little factors, or what are the minor factors in each one of those groupings that come into play.

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So under financial control, there are a number of different things that they look at. One of them is the extent to which the worker has unreimbursed business expenses, now, of course, independent contractors the vast majority of the time. If you think again, the quick, easy example are those who are renting space from you, or they just are in your office with rented space. Or if you think about it, you hire a contractor to come in and fix your plumbing. In those cases, they have a lot of reimbursed business expenses, right? So that’s easy. So the more unreimbursed business expenses that the worker has, then the closer they are to the independent contractor, the more business expense reimbursement that that worker has, the closer they are to employment. So that is kind of a quick, easy way to look at that particular factor. The extent of the worker’s investment – are they required to bring their own tools? Do they have their own adjustment tables or massage tables or whatever? Are they bringing their tools to your workplace or to wherever they’re going to be performing those particular tasks? Are they handling the tools so do they have their own investment? So tools are just an example, but what other investment do they have in their business, if you will, or if they have no investment? So the less investment that they have, the closer we get to them being an employee and not an independent contractor.

Now to what extent does a worker make his self, his services, or her services available to the other people, to the relevant market? In other words, do they work outside of your practice, doing something similar? Some of you may hire a billing service that’s outside, and they perform that billing service for a number of different practices, not just for you. Of course, that’s an easier one, because they have their own business expenses. And basically, when you look at all the factors, very clearly, they’re going to lean toward independent contractor. But if you have somebody in your practice that ultimately is only working for your practice, and then doesn’t really have any of their own business expenses, and they’re utilizing all of your tools, that’s three factors that the IRS would look at under the financial category, and it would all lean in towards them being an employee and not an independent contractor. Remember, want to watch that first video from several weeks ago where we talked about what the consequences of getting this wrong. So there are three of the financial control factors. Now, how do you pay the worker? That’s another one. So you know, typically employees are going to be paid, you know, on an hourly or weekly or monthly type of a wage, whereas independent contractors, typically it’s a flat fee for service. Now, some people just look at this component and they say, Well, this is clearly the main driver. It’s not really the main driver, because there are circumstances where an independent contractor could be paid on an hourly basis, or on a weekly basis, or something along those lines. I just think typically, what they look at is independent contractors typically are paid on kind of a flat fee basis. But then again, if we use the example we’ve been using, the plumber if you will, you know, plumbers come in and they do charge on an hourly basis. So that is, it’s not it’s not always, it’s not hard and fast, and that’s why all of these rules have to be taken into consideration.

So the last financial factor that that comes into play is the extent to which the worker can earn a profit or a loss. And so a lot of that has to do with some of the previous factors we talked about in the financial do they have their own unreimbursed business expenses? Do they have their own investment in play? Is it possible for them to lose money as opposed to just making money? How does all of that come in? And that’s a factor that has to be considered when you’re looking at an independent contractor versus an employee as far as the financial aspects.

Now, the last grouping, the last category, is the type of relationship. And this one, this one’s a little bit different. It looks at things differently. So, you know, when we look at that, that first primary that was a behavioral control, how much control do you have of the worker? You know, we just talked about all the financial factors that are involved, and then we talked about this, the type of relationship. Now, what does that mean? Well, first of all, written contracts are a quick, easy one, right? So if you have a written contract, then that’s not a definitive again, because, you know, many employees have contracts with their employer, and so that’s not a definitive. But typically, contracts help define exactly how a lot of this works. So they may define a lot of the financial factors that we just talked about. Do they have, you know, are they responsible for all of their own business expenses? Are you going to pay them basically a flat fee or a blanket fee? Do they have the opportunity, potentially, to make more profit or less or lose money even because of the levels of the levels of investment and expense that they have involved? All of those factors come into play, but you put those in the contract, and you put the intent in the contract, and that will help. That is one of the factors. Again, it’s not the only factor. It’s really important. Just because your contract says that they’re an independent contractor, they don’t meet a lot of the other factors the IRS very well could determine that they’re an employee and not an independent contractor. So, a contract is really important. A written contract that is is very important, where you lay out all of those provisions.

So now, what about the permanency of the relationship? If it’s an open-ended contract, for example, it doesn’t have a start and it doesn’t have a finish, and there isn’t a job completion opportunity, then that can also begin to lean to where they’re an independent contractor and not necessarily an employee. So that’s going to be another factor under this whole type of relationship that the IRS considers. And then the last of the type of relationship factors that the IRS considers, you know, the services performed by the workers are they a key aspect of your business, and that’s really important. In other words, does your business work with or without that independent contractor? Are the primary services that you offer in your practice – are they being performed by that worker? And in that case, then we’re getting closer to them being an employee and not an independent contractor. And so that’s really important as well. And again, remember, of all of these, I think there’s 15 factors that we talked about over these last two weeks. They look at everything together, and that’s really important. There’s no one of these that you can point to and say, Aha, that makes them an employee, or that’s it. That’s the answer that makes them an independent contractor. You have to look at all of these different factors and take those into consideration as you make the proper determination, because the consequences really are extreme in the financial sense, and you don’t want to go down that route. So let’s just get it right up front. Take a look at the last three videos. If you haven’t done that yet, I strongly encourage it, and let’s get the classification of our workers nailed down pat. Next week, we’re going to talk about a couple of other factors that really do come into play. Do come into play, such as the delegation of duties and fee splitting, as well as some rulings by the Office of Inspector General, OIG in regards to how some of this classification comes into play with Stark Law and things along those lines, we’ll catch you then.