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The Duck Test for Employees

By Pam Saul, Certified Bookkeeper of Saul Bookeeping

There is a saying called the “Duck Test” that goes like this: If it looks like a duck, swims like a duck, and quacks like a duck, then it’s probably a duck. And this holds true when you are trying to decide if someone is an Employee or an Independent Contractor (IC).

When you are trying to classify someone, it is important to follow the guidelines set up by the IRS in making your decision for an individual as an employee or independent contractor. As an overall rule, the IRS maintains that an individual is considered an IC when the payer only controls the result of the work done, and not the process of how or what will be done. They base the relationship on three main areas–financial control, behavioral control, and the relationship of the parties.

To be safe, if it looks like an employee, acts like an employee, and works like an employee (ie the Duck Test), you should assume the person is an employee! And if you are still unsure, the IRS has Form SS-8 where you can request the IRS to determine the status of someone. It won’t do a hypothetical case; it only can be used in actual circumstances. But you can use the questions on that form to help you decide.

In most cases, the status of an individual can be fairly easy to categorize. And it doesn’t matter how hard you want someone to be an IC, if they don’t pass the guidelines, they are an employee. If someone your firm has treated as an IC

tries to file for unemployment benefits, or is injured on the job and tries to file a workers’ compensation claim, or they files a complaint with the U.S. Department of Labor, these are actions that could trigger an investigation and your firm could find out the hard way that the classification of IC wasn’t correct.

The failure to properly classify an individual can be costly. Penalties can be $50 per W-2 not filed, 1.5% of the wages, plus 40% of the FICA taxes (Social Security & Medicare) not withheld plus 100% of the matching FICA taxes the employer should have withheld. And if the IRS feels the misclassification was intentional, they can seek criminal conviction of up to a year in jail and fines as high as $500,000 per organization. And it doesn’t stop there. This could also trigger an audit by your Workers’ Compensation Insurance carrier because you failed to pay premium on necessary payroll.

How can you make sure you correctly categorize an individual? First, and always a great way to protect your company, would be to check with your lawyer and/or CPA. They can help guide you in making the correct decision. Another way is to use the, “ABC Test.” This test is what is used by the IRS in an audit of a firm’s payroll, and by the Work Comp company.

To meet this burden, the hiring entity must establish each of the following three factors, commonly known as the “ABC test”:

(A) that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

(B) that the worker performs work that is outside the usual course of the hiring entity’s business; and

(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In plain English, this

means that the IRS deems everyone that you hire as an employee and you must prove otherwise using all three of the factors above. If you hire someone to work in your office every Friday to send out marketing material– that is an employee (doesn’t meet A). If you hire someone to do overflow work in your business– that is an employee (doesn’t meet B). If you hire someone to clean your office on Saturdays and their regular job is at Home Depot– that is an employee (doesn’t meet C). Here are some other tips to help support the classification of IC:

  • You have a written contract between your organization and the IC

  • The IC provides a FEIN (tax #) for the Tax Form 1099

  • The IC invoices for services rendered

  • The IC provides all materials

  • The IC provides a service that your firm does not

  • The IC provides the same service to other firms

  • The IC carries their own General Business insurance policy

If you have any doubt, make sure you use the Duck Test!

DISCLAIMER: Saul Bookkeeping and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.


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