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If you`re a small business owner or a freelancer, it`s important to know the difference between an independent contractor and an employee. The IRS 20 factor test is a guideline used to determine the status of a worker, and it can have significant implications for both the employer and the worker.
The IRS 20 factor test looks at various aspects of the worker`s relationship with the employer, such as the level of control the employer has over the worker`s work and how the worker is paid. Here are some of the factors:
1. Behavioral control: Does the employer control how the worker performs their work?
2. Financial control: Does the employer control the financial aspects of the worker`s job, such as how they are paid and what expenses are reimbursed?
3. Relationship: What is the nature of the relationship between the employer and the worker?
Each factor is given a certain weight, and if the majority of them point to the worker being an employee rather than an independent contractor, the employer may be required to pay taxes and benefits for the worker. This can be a significant cost for a small business owner, so it`s important to get it right.
Here are some tips for ensuring that your workers are properly classified:
1. Consult with a legal professional: If you`re not sure whether a worker is an independent contractor or an employee, it`s always best to seek the advice of a legal professional who specializes in employment law.
2. Be clear about the relationship: Make sure that both you and the worker understand the nature of the relationship. Are they working for you as an employee or as an independent contractor?
3. Document the agreement: Put the terms of the agreement in writing, including the payment terms and any other relevant details.
4. Keep records: Keep records of all payments made to the worker, as well as any expenses that the worker incurs on the job.
By following these tips and understanding the IRS 20 factor test, you can properly classify your workers and avoid any potential legal or financial issues down the line.