Employee is a catchall term and includes the following three distinctions: common-law employees, statutory employees, and non-statutory employees; hereafter referred collectively as employee. The basics covered in this writing discuss the IRS view of ‘Right to Control’ between the three classes of employee and independent contractor (IC).
The ‘Right to Control’ was discussed previously and remains the central component upon which all employer/employee and employer/independent contractor relationships hinge. The IRS makes this clear in Topic 762 – Independent Contractor vs. Employee. The IRS breaks into three categories the essential components where the ‘Right to Control’ hinges, namely, Behavioral Control, Financial Control, and Type of Relationship.
Behavioral Control relates to the questions, what, where, and how work is to be completed. Employees have set schedules, tight restrictions about how to think, where to sit, etc., dictated by the employer. Independent contractors (IC) answer the ‘what’ and ‘how’ questions themselves, negotiate times and schedules, and possess the freedom to perform the work in a cost effective manner, judged by themselves and the pleasure of the contracting authority.
Financial Control relates to all things money. The employee is forced to accept all terms of the employer without negotiation, from business expenses to taxes, whereas the employer and contractor negotiate all terms. Where financial control is, risk shortly follows; where risk is, the threat of litigation follows. Therefore, when the employer has financial control, risk follows the employer, not the employee. When the contractor has financial control, risk is shared between the contractor and the employer. Profit and loss, tools of the trade, and the freedom to offer services to other organizations are all part of the financial controls that are relinquished by the employee to the employer, or negotiated with the employer and the independent contractor.
Type of Relationship relates to all things in the interaction of the two independent parties, which includes written contracts dictating the interaction, risks, penalties, etc. Extent of the relationship is a major point and colludes with permanency and benefits to form the marriage between two independent entities. The employee forfeits control in this arena to the employer who automatically sets the terms, demands compliance, and exerts totalitarian control. The contractor negotiates terms of interaction with the employer, thus the contractor has a constructive voice in the outcome of the contract.
Currently, Publication 15-A governs employee vs. contractor labels and is the authority to refer to when contemplating the differences among employees, all three classifications, and independent contractors. Several examples are included in the publication and the legalese is sufficiently straightforward. The publication can be accessed using the link for Topic 762 above.
Several cautions must be included here:
- I am not a tax attorney; this is not counsel, simply a discussion of changing perspectives.
- No single criterion defines the legal separation between an employee and an independent contractor. The IRS is the decision maker and their publications help define the guidelines.
- It is extremely important to adhere strictly to tax guidelines in determining the differences between contractors and employees. The saying in Vegas is, “The house ALWAYS wins.” This is true of the IRS; the rules continue to change in complexity, increasing volume, and application.
Contained below are the 20-points, commonly referred to as the IRS 20 Factor Test, for determining the differences between employees and independent contractors:
- Level of instruction
- Amount of training
- Degree of business integration
- Extent of personal services
- Control of assistants
- Continuity of relationships
- Flexibility of schedule
- Demands for work – Referring to the percentage of time demanded by a business organization.
- Need for on-site services
- Sequence of work
- Requirements of reports
- Method of payment
- Reimbursement of business expenses
- Tool and material provision
- Investment in facilities
- Profit & Loss – Risk should also be considered specifically here.
- Freedom to contract with other organizations
- Availability to the public
- Control over discharge
- Right of termination
A brief review of these items makes it clear the three main categories of control currently remain. These 20 points label and describe as well as define, classify and spell out succinctly for tax purposes financial control, behavioral control, and type of relationship that separates and identifies the employee and the independent contractor.
Important to note, these same 20-points form the main topics of discussion when writing out the contract for services and provide the perfect starting point for changing the employee-contingent society in the business world today. According to these points and the IRS publications, freeing the American worker is possible, obtainable, and provides the possibility to forever change America for the better through ending the label, “employee”. When everyone is an independent contractor, opportunities abound as the ‘Right to Control’ rests where it should always have been, in the individual hands of free people.
Currently, as of this writing, fiscal cliff negotiations are ongoing. There is talk of increasing tax revenues from small businesses. There is talk of raising taxes on all people. There is talk of everything but drastic, immediate, necessary cuts to spending that is non-military and no one is discussing entitlement reforms with any type of seriousness. This simple movement of employees to independent contractors immediately forces the spending valve closed that allows the government to spend freely by directly placing every citizen as a taxpayer at the higher small business rates. Tax reform will be swift when everybody feels the pain of the taxman at the small business rate. The entire intent of moving the ‘Right to Control’ from employers and business organizations into the hands of regular people is to produce more freedom, to allow knowledge to be valued, enhance the dignity of the individual, and to improve individual working conditions all without forced union participation or giving up rights and liberties to control individual destiny. It cannot be stressed enough that freedom often requires sharing in and overcoming distressful circumstances to accomplish a greater good. Whether those circumstances are experienced in money, time, taxes, etc., everyone must make an investment in freedom.
© 2012 M. Dave Salisbury
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