Independent Contractor vs Employee?
There are a couple of IRS website pages that discuss this issue:
- "Independent Contractor (Self-Employed) or Employee?"
- "Topic 762 - Independent Contractor vs. Employee"
- "Employee vs. Independent Contractor - Seven Tips for Business Owners"
- Brochure - "Independent Contractor or Employee"
General rule of thumb
- Independent Contractor: The employer has the right to control or direct only the result of the work, and not the means and methods of accomplishing the result.
- Employee: The employer can control what will be done and how it will be done.
IRS Revenue Ruling 87-41
(Note: I have substituted "dentist/boss/owner" and "associate dentist" in appropriate places to make it easier to read.)
Ruling 87-41 contains twenty factors that aid in determining whether an individual is an employee or Independent Contractor:
- INSTRUCTIONS. An associate dentist who is required to comply with dentist/boss/owners' instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the dentist/boss/owners have the RIGHT to require compliance with instructions. See, for example, Rev. Rul. 68-598, 1968-2 C.B. 464, and Rev. Rul. 66-381, 1966-2 C.B. 449.
- TRAINING. Training an associate dentist by requiring an experienced employee to work with the associate dentist, by corresponding with the associate dentist, by requiring the associate dentist to attend meetings, or by using other methods, indicates that the dentist/boss/owner want the services performed in a particular method or manner. See Rev. Rul. 70-630, 1970-2 C.B. 229.
- INTEGRATION. Integration of the associate dentist's services into the business operations generally shows that the associate dentist is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the associate dentists who perform those services must necessarily be subject to a certain amount of control by the owner of the business. See United States v. Silk, 331 U.S. 704 (1947), 1947-2 C.B. 167.
- SERVICES RENDERED PERSONALLY. If the Services must be rendered personally, presumably the dentist/boss/owner are interested in the methods used to accomplish the work as well as in the results. See Rev. Rul. 55-695, 1955-2 C.B. 410.
- HIRING, SUPERVISING, AND PAYING ASSISTANTS. If the dentist/boss/owner hire, supervise, and pay assistants, that factor generally shows control over the associate dentists on the job. However, if one associate dentist hires, supervises, and pays the other assistants pursuant to a contract under which the associate dentist agrees to provide materials and labor and under which the associate dentist is responsible only for the attainment of a result, this factor indicates an independent contractor status. Compare Rev. Rul. 63-115, 1963-1 C.B. 178, with Rev. Rul. 55-593 1955-2 C.B. 610.
- CONTINUING RELATIONSHIP. A continuing relationship between the associate dentist and the dentist/boss/owner indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals. See United States v. Silk.
- SET HOURS OF WORK. The establishment of set hours of work by the dentist/boss/owner is a factor indicating control. See Rev. Rul. 73-591, 1973-2 C.B. 337.
- FULL TIME REQUIRED. If the associate dentist must devote substantially full time to the business of the dentist/boss/owner, such person or persons have control over the amount of time the associate dentist spends working and impliedly restrict the associate dentist from doing other gainful work. An independent contractor on the other hand, is free to work when and for whom he or she chooses. See Rev. Rul. 56-694, 1956-2 C.B. 694.
- DOING WORK ON EMPLOYER'S PREMISES. If the work is performed on the premises of the dentist/boss/owner, that factor suggests control over the associate dentist, especially if the work could be done elsewhere. Rev. Rul. 56-660, 1956-2 C.B. 693. Work done off the premises of the dentist/boss/owners, such as at the office of the associate dentist, indicates some freedom from control. However, this fact by itself does not mean that the associate dentist is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the dentist/boss/owner have the right to compel the associate dentist to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required. See Rev. Rul. 56-694.
- ORDER OR SEQUENCE SET. If an associate dentist must perform services in the order or sequence set by the dentist/boss/owner, that factor shows that the associate dentist is not free to follow the associate dentist's own pattern of work but must follow the established routines and schedules of the dentist/boss/owner. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so. See Rev. Rul. 56-694.
- ORAL OR WRITTEN REPORTS. A requirement that the associate dentist submit regular oral or written reports to the dentist/boss/owner indicates a degree of control. See Rev. Rul. 70-309, 1970-1 C.B. 199, and Rev. Rul. 68-248, 1968-1 C.B. 431.
- PAYMENT BY HOUR, WEEK, MONTH. Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on § straight commission generally indicates that the worker is an independent contractor. See Rev. Rul. 74-389, 1974-2 C.B. 330.
- PAYMENT OF BUSINESS AND/OR TRAVELING EXPENSES. If the dentist/boss/owner ordinarily pay the associate dentist's business and/or traveling expenses, the associate dentist is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the associate dentist's business activities. See Rev. Rul. 55-144, 1955-1 C.B. 483.
- FURNISHING OF TOOLS AND MATERIALS. The fact that the dentist/boss/owners furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship. See Rev. Rul. 71-524, 1971-2 C.B. 346.
- SIGNIFICANT INVESTMENT. If the associate dentist invests in facilities that are used by the associate dentist in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the dentist/boss/owner for such facilities and, accordingly, the existence of an employer- employee relationship. See Rev. Rul. 71-524. Special scrutiny is required with respect to certain types of facilities, such as home offices.
- REALIZATION OF PROFIT OR LOSS. An associate dentist who can realize a profit or suffer a loss as a result of the associate dentist's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the associate dentist who cannot is an employee. See Rev. Rul. 70-309. For example, if the associate dentist is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the associate dentist is an independent contractor. The risk that an associate dentist will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risK to support treatment as an independent contractor.
- WORKING FOR MORE THAN ONE FIRM AT A TIME. If an associate dentist performs more than de minimis services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the associate dentist is an independent contractor. See Rev. Rul. 70-572, 1970-2 C.B. 221. However, an associate dentist who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.
- MAKING SERVICE AVAILABLE TO GENERAL PUBLIC. The fact that an associate dentist makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship. See Rev. Rul. 56-660.
- RIGHT TO DISCHARGE. The right to discharge an associate dentist is a factor indicating that the associate dentist is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the associate dentist to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications. Rev. Rul. 75-41, 1975-1 C.B. 323.
- RIGHT TO TERMINATE. If the associate dentist has the right to end his or her relationship with the dentist/boss/owner at any time he or she wishes without incurring liability, that factor indicates an employer- employee relationship. See Rev. Rul. 70-309.
Here's a link to the complete text of this IRS Revenue Ruling 87-41 in a pdf file.
Twenty Questions - This is from a non-IRS website , but seems helpful.
I have replaced "dentist/boss/owner" for "Principal"; and "associate dentist" for "worker" to make it easier to read.
For the following questions, a "yes" answer means the worker is an employee.
- Does the dentist/boss/owner provide instructions to the associate dentist about when, where, and how he or she is to perform the work?
- Does the dentist/boss/owner provide training to the associate dentist?
- Are the services provided by the associate dentist integrated into the dentist/boss/owner's business operations?
- Must the services be rendered personally by the associate dentist?
- Does the dentist/boss/owner hire, supervise and pay assistants to the associate dentist?
- Is there a continuing relationship between the dentist/boss/owner and the associate dentist?
- Does the dentist/boss/owner set the work hours and schedule?
- Does the associate dentist devote substantially full time to the business of the dentist/boss/owner?
- Is the work performed on the dentist/boss/owner's premises?
- Is the associate dentist required to perform the services in an order or sequence set by the dentist/boss/owner?
- Is the associate dentist required to submit oral or written reports to the dentist/boss/owner?
- Is the associate dentist paid by the hour, week, or month?
- Does the dentist/boss/owner have the right to discharge the associate dentist at will?
- Can the associate dentist terminate his or her relationship with the dentist/boss/owner any time he or she wishes without incurring liability to the dentist/boss/owner?
- Does the dentist/boss/owner pay the business or traveling expenses of the associate dentist?
- Does the associate dentist furnish significant tools, materials and equipment?
- Does the associate dentist have a significant investment in facilities?
- Can the associate dentist realize a profit or loss as a result of his or her services?
- Does the associate dentist provide services for more than one firm at a time?
- Does the associate dentist make his or her services available to the general public?