Independent Contractor Definition – IRS Updates Website

This topic has been covered many times in the articles on this website.  In October 2021, the IRS seems to have narrowed the independent contractor definition.

The debate on who is or is not an independent contractor still occurs today.   We received a call last week from a nice business owner that realized his major independent contractor may not have had Workers’ Comp coverage.

Once we finished our phone conversation – including who is considered an independent contractor and who is not during a premium audit – I decided to see if the IRS had updated its independent contractor definition.  The term has changed a little on the IRS website, including a new webpage.

Updated Independent Contractor Definition

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.

If you are an independent contractor, then you are self-employed. The earnings of a person who is working as an independent contractor are subject to self-employment tax. To find out what your tax obligations are, visit the Self-Employed Individuals Tax Center.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. 

If an employer-employee relationship exists (regardless of what the relationship is called), then you are not an independent contractor and your earnings are generally not subject to self-employment tax. However, your earnings as an employee may be subject to FICA (social security tax and Medicare) and income tax withholding.

This blog post is provided by James Moore, AIC, MBA, ChFC, ARM, and is republished with permission from J&L Risk Management Consultants. Visit the full website at www.cutcompcosts.com.

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