The financial test looks at who controls the economics of the worker’s job. For example, whether the firm will reimburse his or her travel expenses and the like, and whether the individual provides the necessary job-related tools and supplies. Being paid by the hour is indicative of employee status, whereas a single payment to complete a job is favorable for contractor status. Ditto for the ability to work for more than one firm and having the opportunity to make a profit or suffer a loss.
And the type-of-relationship test examines how the parties perceive each other from a business perspective. Evidence of an employer-employee relationship includes providing paid vacation, sick leave and retirement benefits, as well as hiring the worker to render services indefinitely rather than for a specific project or period of time. A written contract setting forth the worker’s classification as a contractor or employee isn’t determinative, so the Service needn’t follow a contract stating that the worker is an independent contractor responsible for paying his or her self-employment tax.
Companies whose classifications are challenged may qualify for an easing: Section 530 relief, a provision in a 1978 law barring IRS reclassifications of contractors as employees in cases where a firm filed 1099s on the disputed workers and treated all similarly situated workers as contractors. In addition, the company must have a reasonable basis for treating them as contractors and not employees.
Valid reasons include reliance on a prior court decision or Revenue Service ruling, a previous employment tax examination or a long-standing industry practice. President Obama has sought to repeal this relief. But Congress won’t tackle this issue until it takes up tax reform, so this easing is safe for at least the next couple of years.