The Independent Contractor

1
The Independent Contractor

• Presented on behalf of the AAMT by Trudi
  Griffith, CEO
• AccuScribe Transcription Services, LLC
• May 11, 2006

2
Independent Contractor

• The general rule is that you, the payer, have the
  right to control or direct only the result of the
  work done by an independent contractor, and not
  the means and methods of accomplishing the result.

3
What factors determine an independent contractor
status? 

• Facts that provide evidence of the degree of
  control and independence fall into three
  categories behavioral control, financial
  control, and the type of relationship of the
  parties.

4
How are these factors proven? 

• The substance of the relationship, not the label,
  governs the worker's status.
• In any employee-independent contractor
  determination, all information that provides
  evidence of the degree of control and the degree
  of independence must be considered.

5
The facts that provide this evidence fall into
three categories

• Behavioral Control
• Financial Control
• Type of Relationship itself

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Behavioral Control

• THE CONTROL
• When and where to do the work.
• What tools or equipment to use.
• What workers to hire or to assist with the work.
• Where to purchase supplies and services.
• What work must be performed by a specified
  individual.
• What order or sequence to follow.
• THE TRAINING

7
Financial Control

• The extend to which the worker has un-reimbursed
  business expenses.
• The extend of the workers investment.
• The extent to which the worker makes his or her
  services available to the relevant market.
• How the business pays the worker.

8
Type of Relationship

• Facts that show the parties' type of relationship
  include
• Written contracts describing the relationship the
  parties intended to create.
• Whether or not the business provides the worker
  with employee-type benefits, such as insurance, a
  pension plan, vacation pay, or sick pay.
• The permanency of the relationship.
• The extent to which services performed by the
  worker are a key aspect of the regular business
  of the company.       

9
What are the responsibilities of the IC?

• Tax reporting information
• The business may be required to give you Form
  1099-MISC, Miscellaneous Income, to report what
  it has paid to you.
• And

10
Tax Reporting Information

• The IC is responsible for paying his or her own
  income tax and self-employment tax
• (Self-Employment Contributions Act SECA). The
  business does not withhold taxes from your pay.
  You may need to make estimated tax payments
  during the year to cover your tax liabilities.

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Tax Reporting Information

• The IC may deduct business expenses on Schedule C
  of his or her income tax return.

12
IRS Challenges

• The majority of classifications of workers are
  not challenged by the IRS.
• When they are, there is usually agreement between
  the IRS and the business after the facts and
  circumstances are jointly reviewed.

13
Section 530 of the Revenue Act of 1978

• Section 530 can in certain circumstances relieve
  businesses of employment tax liability resulting
  from worker classification

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What does self-employed mean to an IC?

• You are your business.
• How you perform your job determines how much work
  you receive.
• You have none of the employee protections or
  advantages including benefits, paid time off,
  holiday pay, etc.

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Advantages of Hiring ICs

• Contractors pay for themselves
• No benefits administration or costs
• No tax liability
• Can contract with as many people as you want
• No added supervisory staff needed as company
  grows
• Can easily term relationship if production is low
• No unemployment or workers comp liability

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Disadvantages of Hiring ICs

• Cannot supervise or control their work
• Liability if they are treated as an employee
• Possibly be more difficult to recruit without
  benefits
• Cannot discipline if performance is poor
• No loyalty or ownership of work
• Fewer employees means costs of benefits greater
  per person
• Contractors have access to proprietary
  information, but MTSO has less ability to monitor
  and manage how they treat the information

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Six Primary Issues to Determine IC Status

• Does the business have the right to control the
  manner in which work is performed?
• Has the contractor a special or unique skill?
• Is the service an integral part of the business?

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Six Primary Issues to Determine IC Status

• Is there a degree of permanence in the working
  relationship between the individual and the
  business?
• Does the individual have a loss or profit
  opportunity, depending upon results?
• Does the individual have an investment in
  equipment or materials necessary for the work?

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Internal Revenue Service's 20-Factor Control Test

• 1 Is the individual's work vital to the
  company's core business?
• IC services typically are limited to
  non-essential business activities.
• Employee activities are integrated with the
  organization's business operations.

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Internal Revenue Service's 20-Factor Control Test

• 2 Did the company train the individual to
  perform tasks in a specific way?
• 3 Do you (or can you) instruct the individual as
  to when, where, and how the work is performed?
• 4 Do you (or can you) control the sequence or
  order of the work performed?

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Internal Revenue Service's 20-Factor Control Test

• ICs generally are considered "experts" in their
  field and, as such, can determine which work
  methods are most appropriate. Additionally, they
  typically are held accountable only for outcomes,
  not the means with which they are achieved.
• Employees usually are taught the specific work
  procedures that they are expected to follow and
  must comply with any other employer requirements
  with regard to these activities.

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Internal Revenue Service's 20-Factor Control Test

• Do you (or can you) set the hours of work for the
  individual?
• ICs can work whatever hours they choose, provided
  that agreed-upon deadlines are met.
• Employees generally work on a schedule determined
  by their employer.

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Internal Revenue Service's 20-Factor Control Test

• 5 Do you (or can you) require the individual to
  perform the work personally?
• 6 Do you (or can you) prohibit the individual
  from hiring, supervising, and paying assistants?

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Internal Revenue Service's 20-Factor Control Test

• ICs are free to delegate to their own staff or
  subcontract the work to others.
• Employees must do the tasks for which they were
  hired themselves.

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Internal Revenue Service's 20-Factor Control Test

• 7 Does the individual perform regular and
  continuous services for you?
• ICs work on a project-by-project basis, each time
  with a new contract.
• Employees typically have an open-ended
  relationship with a company, even if the work is
  performed at irregular intervals.

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Internal Revenue Service's 20-Factor Control Test

• 9 Does the individual provide services on a
  substantially full-time basis to your company?
• 10 Is the company the sole or major source of
  income for the individual?

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Internal Revenue Service's 20-Factor Control Test

• ICs do not spend so much time with any one
  company that they are restricted from doing
  projects for others and, in fact, generally work
  for multiple clients concurrently.
• Employees usually are expected to devote all
  working hours to their employer.

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Internal Revenue Service's 20-Factor Control Test

• 11 Is the work performed on your premises?
• ICs are free to work off-site, such as in a home
  office.
• Employees ordinarily are required to work
  on-site.

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Internal Revenue Service's 20-Factor Control Test

• 12 Do you (or can you) require the individual to
  submit regular reports, either written or oral?
• ICs are responsible for producing a final
  deliverable and are not, therefore, required to
  provide interim reports.
• Employees may be asked to provide status or
  activity reports on a regular basis.

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Internal Revenue Service's 20-Factor Control Test

• 13 Does the company pay the individual by the
  hour, week, or month?
• ICs generally are paid for their results, not the
  amount of time worked.
• Employees usually are paid at fixed intervals.

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Internal Revenue Service's 20-Factor Control Test

• 14 Does the company pay the individual's travel
  and business expenses?
• ICs usually are expected to incorporate
  out-of-pocket expenses into their project fee
  rather than be directly reimbursed for them.
• Employees who incur work-related expenses
  typically are reimbursed by their employer.

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Internal Revenue Service's 20-Factor Control Test

• 15 Are tools or equipment furnished for the
  individual?
• ICs are expected to own and use their own
  supplies.
• Employees generally use company-provided
  supplies.

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Internal Revenue Service's 20-Factor Control Test

• 16 Does the individual have a significant
  investment in facilities, tools or equipment?
• ICs incur expenses related to work space,
  equipment, etc., like any other business owner.
• Employees typically use their company's
  facilities, tools and equipment.

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Internal Revenue Service's 20-Factor Control Test

• 17 Can the individual realize a profit or loss
  from his or her services to the company?
• ICs run the risk of non-payment if a project is
  not completed according to the specifications
  detailed in the contract.
• Employees usually can expect steady paychecks

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Internal Revenue Service's 20-Factor Control Test

• 18 Does the individual make his or her services
  available to the general public?
• ICs publicize their services to a wide range of
  potential clients via direct mail, advertising,
  etc.
• Employees typically do not position and market
  themselves as service providers.

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Internal Revenue Service's 20-Factor Control Test

• 19 Can the individual terminate the relationship
  without liability?
• 20 Does the company have the right to discharge
  the individual at any time?

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Internal Revenue Service's 20-Factor Control Test

• ICs legally are obligated to complete projects
  according to contract provisions and can be
  dismissed only if they fail to do so.
• Employees can quit at any time and can typically
  be released "at will" by their employers.