Michigan State University Extension
Home-Based Business - 09159406
10/01/98
Definition of independent contractor
Questions on independent contractors versus employees continue to be asked by small business owners.
In cases where no specific statute applies, a common-law test to is used to determine whether an employee-employer relationship exists for federal tax purposes. Under this test, such a relationship exists if the person contracting for services has the right to control not only the result of the services but also the means by which the result is accomplished. Whether the control exists is determined by an examination of all relevant facts and circumstances. Because the test is, to a degree, subjective, the IRS and taxpayers may occasionally reach different conclusions. A list of the 20 common-law factors considered by the IRS can be found Rev. Rul. 87-41, 1987-1 C.B. 296. The 20 factors are designed as guides; the degree of importance of each factor depends on the occupation and the context in which the services are performed.
Regardless of an individual's status under the common-law test, section 530 of the Revenue Act of 1978 (P.L. 95- 600) provides a "safe harbor" rule that may allow a taxpayer to treat a worker as an independent contractor for employment tax purposes if the taxpayer has a reasonable basis for doing so. A "reasonable basis" may include (1) past IRS audit practice, (2) published rules or judicial precedent, or (3) longstanding recognized practice in the taxpayer's industry. Relief under section 530 is available only if certain additional requirements are met; for example, the taxpayer may not have treated any individual holding a substantially similar position as an employee beginning after 1977.
Additional information on the independent contractor classification can be obtained by calling the IRS toll- free at 1-800-829-3676 to request a free copy of Publication 937.
Source: The Small Business Advocate, U.S. Small Business Administration, Office of Advocacy, January 1994.