It happens every day. A firm faces a large increase in its Workers Compensation premiums because the government or insurance carrier has decided that all of its independent contractors are really employees. All too often, the true relationship between the firm and the other party was left ambiguous. When it comes to Workers Comp, “ambiguous” often means “employed.”
It makes sense to minimize this gray area. In many states, laws define the independent contractor relationship. Where there’s no such definition, the worker’s status is usually determined by applying the “common law test,” which the IRS uses for FICA, FUTA, and FIT withholding.
This standard has three parts: behavioral control, financial control, and the relationship of the parties – all considered together. The IRS offers these guidelines:
- Behavioral Control shows whether your company has a right to direct or control how the worker does the work, whether or not it actually does so.
- Financial Control shows whether there’s a right to direct or control the business part of the work. For example, workers who are not reimbursed for some or all business expenses might be independent contractors. Also, workers’ ability to make a profit or incur a loss suggests that they might be in business for themselves as independent contractors.
- Relationship of the Parties illustrates how the business and the worker perceive their relationship. For example, a written contract might show what both you and the worker intend. This might be highly significant if it’s difficult to determine status based on other facts.
For more information, or to be certain that you’re up to date on the latest requirements in your state, please contact our Workers Compensation specialists. Minimizing the gray isn’t just about hair color anymore.