(Reprinted for the many agency owners calling to determine the status of their staff as either employees or independent contractors ¡V Al Diamond)
OR ¡V He or She MAY BE AN EMPLOYEE IF¡K (With my apologies to Jeff Foxworthy)
This question comes up frequently with respect to payroll taxes, to benefits programs and to workers compensation rules. This is obviously an important issue, the results of which can cause state and IRS problems that can haunt you for a long time. The determination of status as an employee or contractor is not one of convenience or money-saving efforts. It is one of law and you must consider these guidelines carefully before designating people to either category.
Whether a worker is an independent contractor or an employee is based on three main issues:
« BEHAVIORAL CONTROL
« FINANCIAL CONTROL
« RELATIONSHIP OF THE PARTIES
These are each subjective considerations, but they must be made carefully for each worker to avoid future problems for both the worker and the employer.
BEHAVIOR CONTROL
He or She may be an employee if you direct and control the worker —
This doesn¡¦t have to be specific instructions (although the procedure of inputting customer information or transactions into an automation system certainly qualifies). General instructions like who to solicit (what lines of business, target markets, geographic areas), how they are to be solicited (marketing plans used by producers), responses to solicitations (like Sales Call Reports) and directions of how to process those prospects (like specifically and fully completing applications for underwriting) are forms of control that will likely be defined as an employee/employer relationship rather than one of independent contractor. If you provide direct training to allow the person to do the job, He or She may be an employee.
FINANCIAL CONTROL
There is no precise dollar or percentage test to determine whether the employer has financial control over a worker or if the worker has made a significant investment in his/her work. But:
« He or She may be an employee if you pay for all the equipment (like computers, reference materials, office equipment) used by the worker.
« He or She may be an employee if you reimburse business expenses (like mileage, T&E, education, licensing, etc)
« He or She may be an employee if He or She either can¡¦t profit from his/her increased profitability to you OR if He or She can¡¦t suffer financial loss from his/her failed efforts.
RELATIONSHIP OF THE PARTIES:
« He or She may be an employee if He or She receives benefits, pension, or paid vacation.
« He or She may be an employee even if He or She doesn¡¦t receive benefits (based on other considerations)
« He or She may be an employee if there is a written contract between the worker and the business
« He or She may be an employee if He or She works only for one employer and/or maintains an office (at no cost) at the employer¡¦s location.
As you can see, most workers in insurance agencies will be defined as employees based on these considerations. Please consult your tax and legal advisors to make certain that you are following the guidelines regarding how you treat your workers. You may also call Agency Consulting Group, Inc. (800-779-2430) to speak to Sherry Diamond, EA. As an Enrolled Agent and Past President of the N.J. Association of Tax Professionals, and an expert in taxation (and by the way a great wife, mother and grandmother) Sherry can help explain these guidelines to you.
Here is a questionnaire used to determine the likelihood of a worker being considered an employee or contractor; the more ¡¥Yes¡¦ answers, the more likely that the individual will be considered an employee.
1. Instructions -Does the boss have the legal right to give instructions to the worker during the work project?
2. Training -Does the boss teach or train the worker to perform the tasks involved in the project?
3. Integration -Is the job such that various components must be performed by various workers independently, with one task finished before the next begins?
4. Services Performed Personally – Does the boss expect that the worker perform the project (him) herself – not by someone else?
5. Hiring, Supervising, or Paying Assistants – Does the boss select, oversee, or compensate individuals helping with the project?
6. Continuing Relationship – Does the worker perform services periodically?
7. Fixed Hours of Work – Does the boss determine when the worker works?
8. Full Time Required – Does the boss expect the worker to work full time or not hold another job with the boss’s competitors?
9. Work on Employer’s Premises – Does the worker perform services at the location of the boss’s business?
10. Set Sequence or Order – Does the boss have the right to tell the worker which tasks to perform first?
11. Oral or Written Reports – Does the boss expect the worker to report progress as the job is in process?
12. Payment by Units of Time – Does the boss compensate the worker based on either time worked, commissions, or piecework rather on completed project?
13. Payment of Business or Travelling Expenses – Does the boss pay for out-of-pocket expenses of the worker for travel or entertainment?
14. Furnishing Tools or Materials – Does the boss provide the tools or materials necessary for the worker to complete the task?
15. “Significant” Investment – Does the boss have more money at risk in the performance of the task than the worker, (excluding any vehicle owned by the worker and used for any purpose within the task)?
16. Realization of Profit or Loss – Does the boss risk more out-of-pocket money than the worker excluding the possibility the worker may not get paid?
17. Multiple Jobs – Does the boss require the worker to only work for the boss’s business in the same industry?
18. Available to the Public – Does the nature of the worker’s commitment to the boss severely reduce or restrict the ability of the worker to work for other bosses in the same industry?
19. Right to Discharge – Can the boss terminate the worker during the project without showing violation of the contract?
20. Right to Terminate – If the worker arbitrarily quits, does the boss still have to pay for the work completed even though the project is not yet finished?
IMPORTANT EXCEPTION ¡V The tax law specifically exempts Life Insurance Producers from the requirements of employees.
AND NEW DEVELOPMENTS ¡V The State of New Jersey (and other states may be doing the same) has issued a law that simply states that if one is not registered as a business in the State of New Jersey, He or She is automatically considered an employee of whichever business for which He or She performs work. The goal of the State is to collect Unemployment Insurance from anyone with employees (and from businesses trying to avoid this cost for workers who should be considered employees). This has yet to be challenged, but is a clear effort to convert Schedule C filers into employees of others if they are not a registered business.
Please get IRS publication 1779 (Rev. 1-2005) ¡V catalog # 16134 for a brochure on the subject (www.irs.gov)