Independent Contractor Test: Massachusetts vs. IRS
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Your accountant may have told you that you could classify certain employees as independent contractors. Your accountant may be right in terms of tax treatment. But you should understand that the IRS test is not the same as Massachusetts law.
The differences between the two tests causes a lot of confusion for business owners in Massachusetts. What you need to remember is that even if the IRS accepts the independent contractor status, you may still have a problem under Massachusetts law. |
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Definition of Contractor: The IRS Version
The IRS historically used a "20 factor test" to answer this question. This test has now been compressed into three general categories. These are behavioral control, financial control, and evidence of the nature of the relationship between the contractor and the business.
The "behavioral control" factor is not that different from the Massachusetts test. The IRS will look at the extent to which the employer is directing and supervising the work of the contractor. The more the contractor is free from control, the more likely their classification will be valid.
"Financial control" looks at who bears the cost of expenses and how the worker is paid. Like Massachusetts law, the contractor's freedom to provide services to others is an important consideration.
The IRS will look broadly at the relationship between the parties. This includes how they define their relationship in the independent contractor agreement. They will also ask whether the service performed by the contractor is central to the usual course of business of the employer.
The "behavioral control" factor is not that different from the Massachusetts test. The IRS will look at the extent to which the employer is directing and supervising the work of the contractor. The more the contractor is free from control, the more likely their classification will be valid.
"Financial control" looks at who bears the cost of expenses and how the worker is paid. Like Massachusetts law, the contractor's freedom to provide services to others is an important consideration.
The IRS will look broadly at the relationship between the parties. This includes how they define their relationship in the independent contractor agreement. They will also ask whether the service performed by the contractor is central to the usual course of business of the employer.
Definition of Contractor: How the IRS definition is Different from Massachusetts
Though the IRS is looking at many of the same things, Massachusetts law is different in a few key respects.
First, the IRS test allows a balancing of several factors. It is possible that the IRS would consider the relationship overall to be that of a contractor, even if the contractor is providing services central to the employer's business. Similarly, a contractor who works exclusively for one company may still pass the "financial control" test if other facts are present.
In contrast, the Massachusetts Independent Contractor law is more specific. If the work you do is part of the employer's usual course of business, you do not meet the business prong of the test. If you are not customarily engaged in an independently established trade, occupation or profession, you do not meet the third prong of the test.
Second, the IRS test does not require that all three tests are satisfied. In contrast, in Massachusetts you must meet all three parts of the three part test.
First, the IRS test allows a balancing of several factors. It is possible that the IRS would consider the relationship overall to be that of a contractor, even if the contractor is providing services central to the employer's business. Similarly, a contractor who works exclusively for one company may still pass the "financial control" test if other facts are present.
In contrast, the Massachusetts Independent Contractor law is more specific. If the work you do is part of the employer's usual course of business, you do not meet the business prong of the test. If you are not customarily engaged in an independently established trade, occupation or profession, you do not meet the third prong of the test.
Second, the IRS test does not require that all three tests are satisfied. In contrast, in Massachusetts you must meet all three parts of the three part test.
Misclassification If You Meet the IRS Test But Not the Massachusetts Test
If the IRS is satisfied, you will not be responsible for tax liabilities associated with employees. You will continue to issue these workers 1099 forms, and will not need to withhold federal taxes from their checks.
If you do not meet the Massachusetts three part test, your concern is less about taxes and more about employment law. The individuals classified as contractors could seek damages in a civil suit. These damages could include the self-employment taxes the contractor has to pay. They could also include the value benefits available to employees but not contractors in your business.
Less common but still possible is an investigation by the Massachusetts Attorney General. A contractor who questions his or her status can file a complaint with the Attorney General. The Attorney General in turn has the legal authority to investigate the claim. The Attorney General may assess fines or penalties in addition to damages payable to the contractor.
If you do not meet the Massachusetts three part test, your concern is less about taxes and more about employment law. The individuals classified as contractors could seek damages in a civil suit. These damages could include the self-employment taxes the contractor has to pay. They could also include the value benefits available to employees but not contractors in your business.
Less common but still possible is an investigation by the Massachusetts Attorney General. A contractor who questions his or her status can file a complaint with the Attorney General. The Attorney General in turn has the legal authority to investigate the claim. The Attorney General may assess fines or penalties in addition to damages payable to the contractor.
What if Independent Contractor Status is the Norm in Your Industry?
There are certain industries where the use of independent contractors is widespread, even though it probably is employee misclassification. Companies involved in publishing and design services often use freelancers, for example. Consulting companies, especially in the IT consulting space, often use independent contractors. In many of these cases the entire business model is built around this kind of labor.
This, plus assurances from your accountant, may cause you to believe your independent contractor status is valid.
For all of the reasons above, this may not be true. You should consult with an employment lawyer to determine whether your workers should be paid as employees instead of contractors.
This, plus assurances from your accountant, may cause you to believe your independent contractor status is valid.
For all of the reasons above, this may not be true. You should consult with an employment lawyer to determine whether your workers should be paid as employees instead of contractors.
How Our Employment Lawyers Can Help
We have helped many individuals and business owners understand the Massachusetts independent contractor law. We would love to help you get clarity on your rights and obligations, and take the steps you need to take to protect your rights. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
