In recent years, the IRS and state tax authorities have cracked down on the improper classification of workers. As an employer, it can be difficult to determine if you have an employee or a contractor without assistance. The IRS has recently published the following updated guidelines to help employers as they navigate various employment decisions.

The first step is to determine to business relationship between the company and the person performing services. Per the IRS, the general rule is that an individual who performs services for you is your employee if you can control what will be done and how it will be done.

To further assist employers in the proper determination of worker classification, the IRS provides three categories for further consideration – Behavioral Control, Financial Control, and Relationship of the Parties.

1. Behavioral Control: Does the company direct and control how the worker does their job?

2. Financial Control: Does the company control how the worker is paid, when they are paid, expense reimbursement policies?

3. Type of Relationship: How is the working relationship perceived by the parties? Do you have a written contract defining your relationship? Do you provide employee benefits, things like health insurance, retirement, paid sick time? Will the relationship continue once a certain project is complete?

The state of California has recently taken this definition once step further. The result of Dynamex Operations West, Inc. vs Superior Court, the “ABC Test” outlined new set of standards for worker classification. Under these guidelines, a worker can only be considered an independent contractor if a business can show that the worker meets the following three tests:

A. The worker is free from the direction and control of the company in connection with the performance of the work, both under the contract for the performance of the work and in fact;

B. The worker performs work that is outside the usual course of the employer;

C. The worker is customarily engaged in an independent contractor established trade or business.

If the business cannot show that all three of these tests are met, the worker must be considered an employee for the purposes of wages and withholding. This is an enormous change from the laws that have been in place for decades, and one for which failure to comply can be costly for business owners.

Contact your KS-LLP professional to learn more about correctly classifying your employees.