The standards by which the IRS determines whether a worker is classified as an “employee” or an “independent contractor” have been modified. Prior to the modification which was made early in 2006, the IRS used a complex “20 factor” test, which proved difficult to use. In an attempt to simplify the test, the IRS created three primary categories, which encompass 11 factors for consideration.
The three main categories that the IRS now considers are: (1) behavioral control, (2) financial control, and (3) the type of relationship between the health care entity and worker. The behavioral control factor analyzes facts that show whether the business has a right to direct and control. For example, if the business instructs the worker when, where, and how to work, or if they dictate what tools or equipment to use, and what other workers to hire, this tends to show control and indicates that the worker is an employee.
The financial control factor looks for facts that show whether a business has a right to control the business aspects of that worker’s job. For example, an independent contractor is more likely to have expenses that are not reimbursed, and is more likely to have a significant investment in what is needed to get the job done. The third and final category looks to the type of relationship. For this category, the IRS looks for facts that show the parties’ relationship. For example, the IRS will look for a written contract describing the relationship and benefits offered.
The determination of whether a worker is an “employee” or an “independent contractor” is important because the employer-entity is responsible for the withholding and/or paying of several employment taxes, such as federal income taxes, social security and Medicare taxes, and federal unemployment taxes. However, this determination is of even greater significance to those in the health care field because several other agencies (i.e. Office of Inspector General and the Centers for Medicare and Medicaid Services) have adopted the IRS’s definition of “employee.”
Generally speaking, if the status of the worker is questionable, the IRS takes the position that the worker is treated as an employee, as opposed to an independent contractor. However, if an entity would like to receive a determination on the status of the worker, the employer-entity may complete a FORM SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which can be found HERE.