Why Can’t All My Employees be Independent Contractors?

Over the years, companies have often tried to treat people as independent contractors because it avoids taking care of payroll, you don’t pay benefits, and you that a lot of employer rules won’t apply. Just calling someone an independent contractor does not make them one and the costs of treating someone the wrong way can be substantial.

The IRS looks at 3 general tests to determine if a person is truly an independent contractor or not: the behavioral test; the financial test; and the relationship test. The behavioral test looks at control – does the employer control the hours, location, and type of work performed by the person? Does that person work for other people? The financial test looks at how the person is pad, whether expenses are reimbursed, and who provides the necessary tools and supplies. The relationship test looks at whether the parties have a written agreement in place, whether the work is a one-time project or long term, and the importance of the work performed.

If a person is called an independent contractor, but really should be an employee, the IRS has the right to pursue the business for unpaid employment taxes. Those penalties can go back for three years. The IRS has a number of resources which provide more resources on this issue.

An employer is generally not liable for the actions of independent contractors, but could face liability if the person should have been treated as an independent contractor. An employer does not have to cover independent contractors for workers’ compensation benefits, but the employer could then be subject to liability for injuries to the independent contractor without the benefits of the Workers’ Compensation Act.