The relationship test focuses on how both sides perceive their relationship. Factors include written contracts, employee benefits, duration of relationship and services provided. Does the worker have paid vacation and/or retirement benefits? Is the relationship long-standing?
You must look at the 20-factor test and three-factor test through the lens of the entirety of the relationship. Some of the tests may lean toward treating the worker as employee, whereas others lean toward independent contractor. This is why determining the correct classification can sometimes be difficult.
In addition to the IRS, the DOL uses an economic reality test that focuses on six factors. The DOL test is more likely to classify a worker as an employee than the IRS.
Why is worker classification important? The consequences of a wrong classification can be severe, including criminal prosecution. The IRS has a series of penalties they can impose, inducing 100% of the total tax not collected or paid. So, when there is doubt, it’s better to take the side of employee and not independent contractor.
Editor’s Note: Tax Columnist Rod Mauszycki, J.D., MBT, is a tax principal with CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod’s “Ask the Taxman” column at about.dtnpf.com/tax.
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