Employee or Contractor? (long post)

[Bonni_Graham_at_Enfin-SD -at- PROTEON -dot- COM]

Text item: Text_1

     Well, I couldn't find my handwritten list of points.  I'l probably
     discover someday in my dotage while I'm sitting on the porch, sucking
     my gums and leafing through a yellowed photograph album.  SIGH.

     Anyway, I found something better -- form SS-8 (rev. 1985, and not
     since, I believe), the fomr employers send in to ask the IRS to
     determine if an employee is a contractor or employee.  I think they
     get this when audited, too.

     One thing to bear in mind is that, with a couple of exceptions noted,
     the employer must be violating MORE THAN ONE of these items.

     Anyway, since it's what my list was based on, I present an adapted and
     annotated version of the form:

     1) What is the firm's business and the worker's job description?

        Obviously if the firm's business involved something like sales on
     the premises, and the employee's responsibilities involve dealing with
     these customers, the employee is probably not a contractor.  The IRS
     is trying to determine if the job can realistically be performed by a
     contractor.  On the other hand, if all the other qualifications check
     out, you might still be a contractor.

     2) Describe (by providing a contract or in a written transcription of
     the verbal contract) the work agreement.  If there are any differences
     between the contract and reality, explain.

        If the contract says you're a contractor, you probably are.  But if
     the contract says you're a contractor and the situation in reality
     DOESN'T meet any of the other qualifications, you probably aren't.

     3) Are you being _given_ training or instructions?  Describe and
     attach sample instructions.  Can the employer change your methods?
     Does the employer's business require that you be supervised closely?
     Explain.

        If the co. is paying to send you to a class and it's not
     specifically mentioned in the contract as being part of your fee,
     you're possibly not a contractor.  If the employer is specifying your
     working instructions too closely (beyond, say, requiring a particular
     set of software and style guide) you're probably not a contractor.  If
     the employer is watching you, you're probably not a contractor.

     ** They're fairly picky about this one -- this one can be the only
     violation of the list and be enough to have the IRS consider you an
     employee, not a contractor.

     4) Are you working indefinitely or on term?  Are you required to work
     on a schedule (usually daily, like specific hours).  Do you report to
     the employer?  How regularly?  Why? How?  Attach copies of reports.
     Do you furnish a time record?  Attach example.

     If you're working indefinitely (i.e., an open-ended contract, rather
     than a constantly renewed one) If they're strictly controlling your
     reporting and work habits, you're probably not a contractor.

     ** Like Number 3, this requirement can stand alone as sufficient
     violation.

     5) List what tools, supplies, and materials the employer provides vs.
     what you provide.  List what expenses get reimbursed.

     The idea here is that if they're giving you equipment and it's not
     stated as part of your fee in the contract, you're probably not a
     contractor.  If they're reimbursing you for travel, phone, etc.,
     you're probably not a contractor.  In general, contractors build these
     costs into their fees.

     6) Are you doing it yourself or subcontracting?  If you're
     subcontracting or farming it out to your employees, who pays the
     income and Social Security taxes?

     If the original employer (yours) pays for your employees' tax
     witholdings, you're probably not a contractor.  If you're assigning
     the work to employees or subcontractors and the original employer is
     not involved, you're probably a contractor.

     ** This is another one that can stand alone as a violation.

     7) Where do you do the work (home, on-site, etc.)?

     If you're onsite, the IRS sees grey, and they don't like to.  However,
     if this is the only "violation", you and your employer/client are
     probably ok.  BUT this is one they're planning to crack down on more,
     especially if you're on-site using your employer's equipment.

     8) Do you get an agreed-upon minimum amount?  Can you draw against
     your potential pay?

     I'm not as clear on this one.  I think that if you get paid for work
     you have not yet completed, you begin to fall into a grey area.

     9) Do you get benfits?  Does the employer pay your witholding (not
     generate a 1099, but actually PAY your tax witholding)?  Does the
     employer bond you?

     This is a biggie.  If either answer is yes, you are an employee, not a
     contractor, in most cases.  I think Intel does it differently, but I'm
     not sure how they justify it.  Obviously they care a lot less about
     the benefits than the witholding status.

     10) How many hours a day do you do this?  Do you contract for other
     people, too?  Any non-competition agreements?

     If you work 8 hours a day, you enter a grey area, depending on what
     other conditions apply (closely monitored schedule, on- vs. off-site,
     etc.)  If you contract for other people, the grey area clears up a
     lot.  If you signed a non-competition agreement, it clouds up again.

     11) Can either party terminate the contract with no penalties?

     If yes, you're probably a contractor (and you probably should have
     worded your contract better -- always try to get at least partical
     payment if you're terminated).  This question carries a "if not,
     explain" clause where you can mention what termination liability
     exists, which can put you back on the right side of contracting and
     still allow you to answer No to this question.

     12) How do you represent yourself?

     If you have a business listing in the Yellow Pages, or say to the
     public that youcontract and are available for same, etc. you're a
     contractor.  If you or the company represent you as an employee, you
     enter a grey area.  It's grey because this requirement, I believe, has
     to be violated in conjunction with others before it becomes a problem.

     13) Do you need a license?  What kind? Who issues it?

     If you have to have a license, you're probably a contractor.  BUT,
     since a lot of services that do not require a license are contracted,
     you may still be a contractor, even if you don't.  If the employer
     licenses you, it's another grey area.

     14 & 15) Do you have money at stake in the business performing the
     services (i.e., you)?

     If you may take a loss on the contract, and have invested in your own
     business (i.e., bought equipment, borne travel expenses that will not
     be reimbursed but are part of the fee, etc.) you're a contractor.  If
     you probably won't take a loss, but it's because of the way you worded
     your contract, you can still answer yes to this question, because, for
     example, the employing co. may go out of business.

     16) Has there been any government ruling on this cotnract or that of
     other workers with this co.?

     If yes, and the ruling says you're a contractor, you're a contractor.
     If no, the other requirements are in force.

     17) Do you assmble a product at home?  Who supplies the supplies?

     This really doesn't apply to our kind of contracting, but if the
     answer is yes, but the co. provides materials and instructions, it's a
     grey area.

     18-20) These questions have to do with direct contact with the
     customers of the employer, like for salse, and mostly do not apply, so
     I'm not going to discuss them.

     I hope that helps.  If you feel you're being treated unfairly (for
     example, by having to provide your services at the client site when
     you really could just as easily do them at home) you can cite this
     form, and I believe, ask your employer to file one.  Of course, this
     would be a last resort, since it probably means that you wouldn't work
     for them any more...

     Let me know if you all have any questions -- I'll answer what I can.

     NB:  I AM NOT a tax attorney (or an attorney of any sort).  DO NOT
     interpret this information as legal advice.  This is my interpretation
     of tax form SS-8, based on explanations I have received from legal
     sources.

Bonni Graham                               |
Technical Writer                           | Most software is run by
Easel Corporation, ENFIN Technology Lab    | confused users acting on
Bonni_Graham_at_Enfin-SD -at- relay -dot- proteon -dot- com | incorrect and incomplete
President, San Diego STC                   | information, doing things
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