AG 2008 01 22 - Laserfiche WebLink

Home Browse Search

Memorandum #1079 May 21, 2007 Page 2 should the IRS challenge that treatment and prevail that the worker was an employee and income, social security and Medicare taxes should have been withheld and paid on the worker. Worker status determination is not based on convenience or cost savings to the employer. Instead, the determination is based on applying tests and factors cited in case law and IRS regulations to the facts and circumstances of the particular job. The existence of a written agreement between the government entity and an independent contractor has no significance in support of the independent contractor status. If the local government loses a challenge to the classification of a worker as an independent contractor, the local government may be assessed back taxes, penalties and interest totaling an amount greater than what otherwise would be due if the worker had been treated as an . employee. Following an IRS determination that a worker is an employee, the Workers Compensation Industrial Commission sometimes rule that the worker also should be covered for workers compensation. Worker Status Determination The Internal Revenue Code (Code) does not formally define the term employee. However, the Code in Section 3121(d)(2) provides some guidance by describing an employee as "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee." The determination of worker status is based on the facts and circumstances that exist in light of existing common law. The common law rule for determining worker status is whether the local govemment has the right to direct and control the worker as to the manner and means of performing a job. A local government must consider all the facts and circumstances in deciding whether a worker is an independent contractor or an employee. The facts will fall into three main categories: (1) whether the local government has the right to control worker behavior; (2) whether the local government has financial control over the worker; and (3) the relationship between the local government and the worker. Ina 1987 Revenue Ruling (87-41), the IRS compiled a list of 20 factors that the courts had considered in the right-to-control test. These factors were: 1) Whether the worker must comply with another person's instructions about the work; 2) Whether the worker requires training in order to do the work; 3) Whether the work performed by the worker is integrated into the hiring organization's operations; 4) Whether the worker must perform the services personally; 5) Who hires, supervises and pays the worker's assistants, if any; 6) Whether the worker and hiring organization have a continuing relationship; 7) Whether the work must be performed during set hours; 8) Whether the worker must devote most of his or her time to the work for the hiring organization; 9) Whether the work must be performed on the employer's premises or can be done elsewhere; 10) Whether the Worker must perform services in an order or sequence set by the hiring organization; ~~~