Employee or Independent Contractor?

Not known for its flexibility in analyzing taxpayer situations, IRS comes to a strange conclusion in its recently-issued Information Letter 2012-0069, which says that in certain situations, a consultant working for a company on two separate consulting projects can be both an employee of the company and an independent contractor at the same time!

In determining whether an individual is an employee or an independent contractor under common law, IRS looks at:

  • The relationship of the parties (agreements between them, how they perceive the relationship, and how they represent the relationship to others);
  • Behavioral controls (with respect to how much control the business has over the worker); and
  • Financial controls (including the worker’s risk of loss, and whether he has made a significant financial investment).

IRS actually concludes that a worker can provide services to a business in two separate roles, with respect to two separate projects, simultaneously!