Associations often contract with individuals for bookkeeping, landscaping, or building maintenance services, among other things. The status of these service providers as either independent contractors or employees can have important tax and legal consequences for associations.
The IRS initiated a crackdown in 2010 concerning the classification of independent contractors and employees. The IRS will randomly audit 6,000 companies through 2013 and will generate about $7 billion for state and federal governments from employers that misclassified employees as independent contractors.
When evaluating whether an individual is an independent contractor or an employee, there are several factors to take into consideration. The fact that an association has entered into a contract which explicitly classifies the individual as an "independent contractor" may not be enough to protect the association.
There are three main groups of factors to analyze which include the following: (1) behavioral control; (2) financial control; and (3) type of relationship. Each of these groups is further broken down into specific characteristics, such as the amount of training available, type of payment arrangement, benefits provided, and the duration of the relationship.
The IRS stresses the importance of analyzing all of the surrounding circumstances to determine whether an individual is an independent contractor or an employee because there is not one factor that is dispositive. This determination can be quite complicated and it is a good idea to seek advice from an attorney or tax specialist when entering into a contract that could create an employer-employee relationship.
Please contact our office if you have any questions regarding contracts with your association’s service providers.
Susan Beblavi contributed to the research and writing of this post.