The IRS has developed audit programs that Overview focus on employers who “misclassify” workers as independent contractors. These IRS programs can be expensive for employers and particularly painful for small businesses that may not be able to withstand the “economic strain” of additional employment taxes. And a worker who was misclassified as an independent contractor could also put the business’s retirement and benefit plans in jeopardy for failing to cover all employees.

Here are the factors that determine whether someone should be put on payroll as an employee or can be treated as an independent contractor.  Willful misclassification of employees as contractors is subject to severe penalties including civil penalties of $5000 to $15,000 for each violation in addition to other penalties allowed by law.  Employers that demonstrate a pattern or practice of such violations is subject to civil penalty of $10,000 to $25,000 for each violation.  Aside from the IRS, employee misclassifications may be enforced by the Labor Commissioner or in civil suit.


(1) Instructions: A worker who must comply with instructions about when, where and how to work is considered an employee. An employer has control in this area if he/she has the right to require compliance with instructions.

(2) Training: Independent contractors ordinarily use their own methods and receive no training from their customers about how to do the job. On the other hand, training given the worker by the employer usually shows employee status.

(3) Integration: Employee status is often shown when a worker’s services are integrated into the business’ operations and the success of the business depends on the performance of those services. This factor may be one that works against supporting independent contractor status in nearly every situation–it’s very difficult to establish whether or not success of a business would depend on the worker’s contribution to an overall effort.

(4) Services rendered personally: A business which requires the worker to personally perform the services shows that the Business is interested in the methods used to accomplish the tasks. This, then, shows control by the employer.

(5) Hiring assistants: If a worker hires, pays and supervises assistants to complete a contract that requires the worker to supply materials and labor and be responsible for the result, then the worker is independent. When the employer hires, supervises and pays assistants to help the worker, employee status is indicated for the worker.

(6) Continuing relationship: An employer-employee relationship is indicated if there is an on-going relationship between the employer and worker. This kind of relationship often exists where work is performed at frequently recurring (although irregular) intervals.

(7) Set hours of work: While employees normally have set hours of work, independents set their own hours.

(8) Full-time work: Independents work when and for whom they choose, while employees must work full-time for a business, with restrictions on the worker being able to work elsewhere.

(9) Work done on the premises: Work required to be done on the employer’s premises often indicates control, especially if the work could be done elsewhere. However, control may even be present when a worker performs services in his/her own offices. To pinpoint the importance of this factor, look at the nature of the services being performed. Control over the place of work may be indicated when the business has the right to compel the worker to travel a certain route or work at specific places. The worker should be required to work from his/her own office.

(10) Order of sequence set: When the employer sets the order of an employee’s duties, it shows control by the employer.

(11) Reports: If a worker must submit reports (oral or written) to the employer to account for his/her actions, control is also shown.

(12) Payments: Employee status is shown if a worker is paid by the hour, week, etc. The worker should not be guaranteed a minimum salary nor be offered any fringe benefits. If a drawing account is set up for the worker, the worker should be required to repay any excess drawn from the account over commissions earned. In effect, the job should be paid on a straight-commission basis.

(13) Payments of expenses: If the employer pays business or travel expenses of the worker, the worker is likely to be classed as an employee.

(14) Tools and materials: An employer furnishing all the tools and materials to do the job usually shows that an employer-employee relationship is operative.

(15) Significant investment: An independent has significant investment in facilities or equipment used to perform services for someone else.

(16) Profit or loss: An independent contractor can realize a profit or loss as a result of services performed. For example, a worker who has invested in expensive equipment to do a job runs the risk of incurring a heavy loss from the job. This indicates that the worker is an independent contractor. However, the risk that a worker will not be paid is not sufficient risk to categorically show independent status.

(17) Working for more than one business at a time: When a worker performs services for multiple firms at the same time, independent status is indicated.

(18) Offers service to the general public: When a worker who regularly and consistently makes his/her services available to the general public, he/she is an independent contractor.

(19) Right to fire: Whereas an independent can’t be fired as long as he/she produces a result that meets the specifications of the contract, an employee can be fired.

(20) Right to quit: The reverse of (19) is true here: an employee can quit a job at any time without incurring liability. However, an independent is responsible to meet the terms of a contract.

If you have any questions about anything mentioned above feel free to contact us through our website @ or call us at 424-274-1391.

Thank you for reading….

Best Regards,

Velin & Associates, Inc.

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Address: Dmitriy Velin, CPA 7315 Sunset Blvd., Suite D West Hollywood, CA 90046

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