The mischaracterization of employees as independent contractors has been identified as a major contributor to the rapidly growing gap between what taxpayers owe and what is actually collected. It’s a gap the IRS is making renewed efforts to close.
The full extent of tax revenue lost due to mischaracterization is not known, but recent government estimates suggest nonpayment and underpayment of employment taxes contributes more than $50 billion to the almost $500 billion tax gap. The Government Accounting Office recently estimated that anywhere from 10 percent to 30 percent of employers misclassified at least some employees.
Prior to developing the three general factors listed above, the IRS had identified 20 specific factors to be considered in classifying services providers. The 20 factors, which are still relevant and may be used as a guide, include:
- Control of when, where and how the service provider performs services
- Integration into employer’s operations
- Requirement that services be personally performed
- Control over assistants
- Length of relationship
- Work schedule
- Amount of time required to provide services
- Location where services are to be provided
- Control over techniques or sequence
- Reports to employer
- Payment method
- Work-related expenses
- Work facilities
- Profit and loss potential
- Whether service provider has multiple employers
- Restrictions on service provider’s customers or clients
- Ability of employer to terminate service provider
- Ability of service provider to terminate relationship
Federal tax law classifies certain specific service providers as employees even if they otherwise appear to be independent contractors using common law standards discussed above. For example, the IRS considers certain specified delivery persons, full-time life insurance sales agents, at-home workers who work on materials supplied by the employer and certain specified full-time traveling sales persons to be employees even if they would otherwise be classified as independent contractors. Conversely, real estate agents and direct sellers of consumer products in the home are statutory non-employees (i.e., independent contractors) even if their relationship with their employer would suggest they be classified as employees.