Taxpayers Guide to LLCs and S Corps
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Employee or Independent Contractor Status
If you don’t fit into the statutory employee or nonemployee, then the relationship must be scrutinized. The crucial test revolves around the degree of control that a business has over an individual. According to the Tax Court and IRS, an employer-employee relationship exists when the business retains the right to direct how the work is done and controls the methods used in doing the work.
The business does not have to actually direct or control the way the work is done. Retaining the right or exercising the right is considered the same thing in eyes of the Tax Court.
However, if a business can only control or direct the result of the work being done and not the means of accomplishing the result, then an independent contractor relationship typically exists.
Sec. 31.3121(d)-1(c)(2), Employment Tax Regulations, defines an employer-employee relationship as follows:
Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so.
The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor.
The degree of control or the degree of independence is defined by behavioral control, financial control and the type of relationship (see next articles). There is not a set number of criteria which must be met, or a checklist of sorts. Rather each situation needs to be analyzed considering these three elements of control.