Independent IT Contractor? Ten Audit Questions the IRS Will Ask
Are you an independent contractor, or an employee? Does the IRS agree?
Due to their high degree of specialization and shorter time-lines, IT jobs are some of the most contracted positions in the country. But because many companies misclassify employees in order to avoid surplus taxes, your independent contractor status might flag you for an audit.
When it comes to taxes, it’s essential that IT contractors, and the companies that hire them, correctly make the distinction between independent contractor and employee. Without this understanding, you and your payer could spend thousands in penalties and fees.
Below, we’ve highlighted 10 questions the IRS uses to help classify your employment status. But first, a little background:
What is an Independent Contractor?
An independent contractor provides goods or services, according to a contract, to another business or individual. According to this IRS publication, “an individual is an independent contractor if the payer has the right to control only the result of the work and not what, where or how it will be done.”
But what does that mean? The IRS website lists three factors that the IRS uses to analyze employment status:
Behavioral Control
Behavioral control determines whether or not the payer has the right and/or ability to control how the worker completes their assignments. Evaluating factors on behavioral control can include: training provided, type of instructions given, and the method for evaluating work performed.
Financial Control
Facts referring to financial control are used to determine whether the payer has control over the financial facets of the work, including: reimbursement for equipment and/or other business-related expenses, profit or loss opportunity, payment agreements, and more.
Type of Relationship
The type of relationship refers to the ways the worker and business view the relationship they have to one other. These factors may include: contracts, benefits, time-frame, and whether services provided are determined to be a “key aspect of the business.”
So now we’ve got some definitions to work with, but how do they break down? How does the IRS determine whether a payer is dictating the method, or just the result?
If you can answer “No” to these 10 common law factors, you can (likely) call yourself an independent contractor.
Independent Contractors Can Answer “No” to the Following Questions
1. Does your payer provide instructions about how or when the work is to be done?
2. Are you provided with specific training?
3. Do you provide services that are an integral part of the payer’s business?
4. Are you forbidden to subcontract any part of the work performed?
5. Are you required to devote your full time to the payer?
6. Does the payer ask you to provide written or oral status reports?
7. Are you reimbursed for business and/or travel expenses?
8. Can you be fired or let-go for any reasons other than failing to complete duties outlined in your contract?
9. Are you provided with tools and materials to complete the assignment?
10. Do you have a continuing relationship with the payer?
Admittedly, there’s a lot of grey area here; and these are just some of the questions you will likely have to answer should you experience an audit by the IRS. For more information, check out this IRS publication which helps further explain the distinction between independent contractors and employees.
Knowing how to answer these questions will go a long way in helping you select the right forms and tax-processes; but if you’re wary of going it alone (and who could blame you), try working with an IT staffing agency who’ll get your classification right the first time.
Contact the IT staffing experts at Digital Prospectors to find an IT contracting or permanent position you’ll love, minus the guesswork.
