The IRS at one time used the 20 question rule to determine if a person was a contractor or an employee. But they have tossed out the 20 questions a few years ago and replaced them with 3 questions.
The questions now deal with Behavioral Control, Financial Control and Relationship of the Parties.
Behavioral Control: Does a person receive extensive instructions on how work is to be done?
For example is the person told:
1. how, when or where to do the work?
2. what tools or equipment to use?
3. what assistants to hire to help with the work?
4. Where to purchase supplies and services?
If you answered YES to these then this person is probably an employee.
The 2nd question deals with Financial Control. Does a person have a significant investment in the work. There are no $ limits set by the IRS. The IRS will look at tools, machinery, vehicles, etc... to make that determination. The IRS will also look at if the person's expenses are reimbursed by the company and if the person has the opportunity to make a profit and more importantly a loss. If a person buys his own tools, vehicle, insurance, ladder, meter etc.. and is not remibursed by the company then he is more contractor then employee.
The 3rd quesitons has to do with Relationship of the Parties. Does the company offer benefits to the person, such as insurance, pension or paid leave? Does the company have a written contract with person clearly identifying the person as a contractor. The contract should clearly show the person as an independent contractor and outline your agreement. If the company "does not" offer benefits and has a written contract then this person probably is a contractor.
That is what the IRS says! So now your saying based on your answers your person is half employee and half contractor. If you want to make sure your contractor stays a contractor then you need to do everything possible to treat your person as a contractor. The IRS will way your answers to each question and then make a decision.
I will add the following! Make sure your contractors invoice you. Make sure you have a window instead of an exact time for when the contractor should come in each day. For example: Contractor turn-in is from 8am - 9am vs. you must be here at 8:30am. And finally and most importantly you must file a 1099 on each of contractors that earn more than $600 per year. If you file 1099's and somewhere down the road the IRS decides your contractors are employees they most likely will not charge you back taxes.
Re: Am I an employee or subcontractor?
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