Employee or Independent Contractor – Make Them Pay Rent!

Recently we posted the details on the IRS requirements for determining the difference between employee and independent contractor. Recently, we became aware of the results of an IRS examination on this very point. The Examiner’s position on the issue was very telling.

First, a little background on this case. The business employs instructors on an hourly basis to teach students who have contracted for training from the business. The instructors work at other businesses, keep their own books, set their own hours and determine how they’ll perform their training. The business provides the space and the student and the instructors train.

The question the examiner asked – “do the instructors pay rent for the space while they’re training?” In this case, the answer was “no.” The examiner’s position was pretty straightforward – since the instructor didn’t pay rent, their business didn’t have any “risk” so it wasn’t really a contractor arrangement. That meant the business needed to treat the instructors as W-2 employees and withhold (and pay) all the related taxes.

This particular decision is inconsistent with the tax code. But rather than spending tens of thousands of dollars fighting the decision in tax court, there’s a simple solution. Ask the instructors to pay rent and increase their compensation by the same amount as the rent. Is that legal? Absolutely. Even this particular examiner agreed that simple change would make the difference and the instructors would be categorized as independent contractors.

Sometimes, the best way to win is to avoid the fight. When it comes to independent contractors, make sure there’s the appearance of risk and avoid the battle all together.

Need help determining whether a worker is an employee or independent contractor? Call us today to schedule your free tax consultation. Call (480) 888-7111 or submit a web request here.

By: Evan A. Nielsen