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Independent Contractor or Employee?

Whether it for various tax reasons or for liability reasons, a lot of businesses prefer to treat workers as independent contractors, rather than employees,

It is important to have a good understanding of just what separates an independent contractor from an employee.

Failing to do so can bring the wrath of your local state tax department and the Internal Revenue Service upon you.

The general rule is that an independent-contractor relationship exists if you can control the result of the work, but not the means and methods of accomplishing that result.

To determine independent-contractor classification, you should be able to answer YES to these questions --

  • Is there risk of profit and loss to the individual?
  • Does the individual have the authority to delegate responsibility?
  • Does the individual provide their own work location, tools, and equipment?
  • Does the individual have unrestricted control over the work schedule?
  • Does the individual have control over when, where, and how the work is done?
  • Does the individual incur non-reimbursed expenses in the completion of tasks?
  • Is the individual free to provide similar work for others?
  • Is there a formal agreement defining scope of work, compensation, conditions, and statement of independent-contractor basis?

Although these restrictions are not, by any means, inclusive, and may vary from situation to situation, they do provide a general outline of IRS tests.

To better determine a worker’s status, get more information from your local state employment office or the IRS at http://www.irs.gov in the USA or http://www.cra-arc.gc.ca/ in Canada.

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