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It is critical to correctly classify your workers – as independent contractors, or as employees. In general, the law states that any worker you pay is your employee, unless and until you prove otherwise. Unfortunately, this is a very fact-specific evaluation and there are a variety of tests applied by the different interested state agencies. If you get it wrong and an agency performs an audit, you may be assessed back payroll taxes, penalties, and interest. In addition, once one agency makes the determination, the other interested agencies probably are not far behind.
Most employers are initially concerned with tax treatment so I will address the test applied by the Oregon Department of Revenue. The Federal Internal Revenue Service applies yet another test, however, its evaluation captures many of the factors involved in the former’s test.
To qualify as an independent contractor, the individual and the services provided must meet the following requirements:
- The worker must be able to exercise her own discretion over when and how he or she provides the services.
- The worker must be responsible for her own licenses or certificates as necessary for the work involved.
- The worker must be engaged in her own business. To meet this final requirement the worker must meet three of the following five factors:
a. Maintain his or her own separate business location,
b. Bear the risk of loss for defective work,
c. Have other clients for whom he or she provides the same type of services or regularly seeks other clients,
d. Invest significantly in her own business, or
e. Have the authority to hire or fire other persons to perform or assist in providing the services.
Remember, this is just one of the tests involved. When in doubt, err on the side of an employee to avoid back payroll taxes and penalties.
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