Employee or Independent Contractor? IRS Small Bus/Self Employed SG recommends incentives for voluntary classification

Business clients typically want their workers to be classified as independent contractors.  The significant savings in employment taxes and employee benefits in addition to workers compensation premiums are very attractive.  In Connecticut, the determination for state purposes is commonly referred to as the ABC test.   To be an independent contractor,  the worker must be free from direction and control in the performance of the service, both under the contract of hire and in fact;  and the services must be performed  either outside the usual course of the employer’s business or outside all of the employer’s places of business;  and the worker must be customarily engaged in an independently established trade, occupation, profession or business of the same nature as the service being provided.

With many businesses operating from a home office environment, they will often be able to comply with the 2nd provision regarding business location.   Qualifying under the direction and control provision and the worker’s engagement in an independently established work or business of the same nature presents a greater challenge.  Currently the voluntary IRS Worker Classification Settlement Program (CSP) is only available to companies facing an audit.  Therefore the IRS Small Business/Self Employed Subgroup’s recommendation that this program be expanded is quite significant.  Businesses seeking an SS-8 determination could benefit from incentives such as the waiver of prior year taxes that would have been collected if applied retroactively or rate reductions.  See http://www.irs.gov/Tax-Professionals/SMALL-BUSINESS-SELF-EMPLOYED-SUBGROUP-REPORT for the full report.  Bottom line, despite the Connecticut test previously mentioned, there is no simple measurement with regard to determination of a worker’s status.  The standards are often applied subjectively based on the facts and circumstances under which the determination is brought.  Therefore the recommendations, at least for federal tax purposes, would help assure businesses that the determinations are not biased towards a finding that workers are employees and engaging in the process will not subject them to audit.