The Internal Revenue Service (IRS) has announced it is undergoing an extensive initiative to identify businesses that are incorrectly classifying employees as independent contractors. For those businesses that choose to reclassify their independent contractors as employees the IRS is charging a small penalty payment to cover past payroll taxes. For those businesses who choose to continue with the independent contractor status, but in reality have employees, the IRS could audit the business and assess a large penalty fee.

If you are paying independent contractors that may be considered to be employees, you need to know the difference so that you can avoid a potential audit by the IRS. However, the distinction between an independent contractor and an employee is fuzzy. To help you with this determination, below is a brief summary of some points the IRS will look at. However, as this is a difficult area of the law and one that is undergoing scrutiny, speaking with legal counsel will help you better determine if you are in an employee relationship or not.

The independent contractor (“IC”) must:

1. Have an independent business. A business license is helpful.

2. Be free from the control and direction of your business i.e. is independent.

3. Work outside of your place of business.