Make sure your independent contractors are not employees in the eyes of the IRS

09-13-2013Tax Information

As some companies look to avoid certain administrative and financial headaches of employing workers, they make arrangements with individuals to be independent contractors who generally get paid without benefits and worker protections.

But be careful. The IRS and courts have certain working environment aspects that are used to evaluate the true definition of the worker.

This comes to light again as a federal judge ruled earlier this week that Rick’s Caberet, a strip club, has to pay its dancers minimum wage and treat them as employees. The club had long classified its dancers as independent contractors and were only paid in customer tips, thus skirting minimum wage rules. This week’s ruling means that 1,900 of Rick’s Caberet International current and former dancers can seek back wages, according to

There was a contrary ruling in 2010 when a U.S. district court judge ruled that FedEx drivers are independent contractors after some drivers claimed they were treated like employees and should be given full benefits, according to

Just because there is a contract indicating a worker is an independent contractor, that is not sufficient enough. Be cognizant of the following considerations in the overall work environment:

  • How is the work of the contractor supervised – especially if there are assistants
  • How and where is office space used?
  • Who establishes the contractor’s working hours?
  • Does the contractor work full time or exclusively for you.
  • Who provides ongoing instructions or training?
  • Who provides the equipment or materials necessary to complete the work?

As a business owner, here are some other hints to successfully protect your classification of the worker as an independent contractor

  • Don’t refer to an IC as an employee or to your company as the IC’s employer.
  • Don’t give an IC employment benefits.
  • Don’t give an IC a title within your company.
  • Don’t give an IC business cards or stationery to use that have your company name on them.
  • Don’t pay ICs on a weekly, biweekly, or monthly basis as you pay employees. Instead, require ICs to submit invoices, and pay them at the same time you pay other outside vendors.
  • Follow the terms of the IC agreement, including its termination provisions.
  • Don’t give the IC new work after the original project is completed without signing a new IC agreement.
  • Don’t give the IC employee handbooks or company policy manuals.
  • Don’t pay the IC’s travel or other business expenses directly.
  • Don’t invite an IC to employee meetings or functions.