Finishing Touches, V2I1

Employee or Independent Contractor?

In the manufacturing of sheds, labor is an important component of producing a finished product. Most likely, the cost of labor is in the top three when it comes to the amount of dollars spent in the production of these versatile structures.

Within this industry, the types of manufacturers run the gamut from small to large. For small manufacturers, it can mean that the business owner may be performing most, if not all, of the labor required to produce their particular brand of shed. Larger entities most likely employ their own workers to complete the construction of their product line.

In times of high demand, additional labor may be needed. The choice for the business owner is whether to hire more employees or to outsource to an independent contractor. This decision warrants very careful review and adherence to current IRS regulations governing this very question. Let’s take a look at the tests that the IRS uses to guide employers in their determination.

The test that the IRS uses is commonly known as the “right-to-control test” because each point in the test is used to determine who is in control of the work performed. IRS regulations and common-law practice dictate that in order to be an independent contractor, the control of the services, products, and results of the engagement rest with the independent contractor. Should more control over these processes be exerted by the company, it is more likely that the workers would be considered employees.

The IRS utilizes different factors to classify the control and validity of independent contractors, which include the following:

  • Level of instruction
  • Amount of training
  • Degree of business integration

    Shed builders need to decide whether they are hiring employees or independent contractors.
  • Extent of personal services
  • Control of assistants
  • Continuity of relationship
  • Schedule flexibility
  • Demands for full-time work
  • Need for on-site services
  • Sequence of work
  • Requirements of reports
  • Method of payment
  • Payment of business or travel expenses
  • Provision of tools and materials
  • Investment in facilities
  • Realization of profit or loss
  • Work for multiple companies
  • Availability to the public
  • Control over discharge
  • Right of termination

An additional test is required by the Fair Labor Standards Act (FLSA) to assist in the determination of employee-employer relationships as the Act does not apply to independent contractors. This test is called the economic reality test and focuses on the amount of control exerted by the employer to determine whether an employer-employee relationship exists. The main facts and circumstances that are examined in the decision of employee vs. independent contractor are:

  • the extent of control by the employer over the manner in which work is accomplished,
  • the extent that the worker’s profit or loss opportunity is dependent on their managerial skills,
  • the extent of the worker’s performance of duties for the employer on an ongoing or permanent basis,
  • the extent to which the services performed by the worker are integral to the employer’s business,
  • the extent of the worker’s expenditure in tools and equipment needed to complete the job, and
  • the degree of primary benefit provided to the employer by the worker.

The Tax Code does not define “employee.” It is up to the taxpayer to determine the facts and circumstances of the employment relationship; assistance is available from a couple of sources, the IRS and a CPA. IRS form SS-8 can be completed and submitted for determination of whether an employee-employer relationship exists. The form contains the “right-to-control” factors listed above.

IRS worker classification auditors are trained to examine these three most important factors:

Instructions to workers

If the worker is required to follow the employer’s instructions on how, when, and where the work is to be done, they are most likely an employee.

Job training

If the company provides and/or arranges the training for the worker, this is a flag that work is expected to be performed a certain way; the worker would be considered your employee. Informal training can be construed as meeting attendance or working with someone with more experience.

Worker’s ability to realize a profit or loss

An independent contractor is in business to make a profit by the work they perform and has a greater stake in their business. An employee will always receive compensation for their efforts.

Lastly, the manner in which you report the amounts paid to workers is very important. Reporting on a Form W-2 indicates that both company and worker consider the worker to be an employee.

Labor is an important part of the shed building industry. Classifying your labor force correctly not only allows the quality production of your product, it also provides the employer with peace of mind that they are not in a position that is contrary to the regulations under which they report.


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