Independent Contractor or Emplyee?

[Sarah K.]

Jurisdiction

Pennsylvania

Hello! Would appreciate some guidance on IC vs. Employee status. I have a bookkeeping business that serves all clients remotely. I have two IC bookkeepers that work for me. Both work remotely. Both receive training from me on how to do the bookkeeping for my particular clients, but both have outside training and/or accounting degrees. They provide their own computers. They determine how much they work and when they work. We use a project management tool to track the status of work and any deadlines. One of my contractors is seeking her own clients but hasn't landed any yet, so currently, for both of them, I am their only "client". Any thoughts are appreciated. Thanks!

 

[PayrollHRGuy]

I think I know where you are going with this but an actual question might help.

 

[Zigner]

I think I know where you are going with this but an actual question might help.

The subject of the thread is: "Independent Contractor or Emplyee? (sic)"
I think it's a safe bet that the OP is trying to establish whether these folks would be considered independent contractors or employees and is asking for guidance/advice on making such a determination.

 

[PayrollHRGuy]

I think you are correct but I'd hate to cause confusion.

 

[adjusterjack]

I am their only "client"

No, you are their employer as long as they are performing work on your own clients, you bill your clients, and pay them a commission or hourly rate.

This is why they are employees:

Both receive training from me on how to do the bookkeeping for my particular clients,

You control the "how" which makes your other comments irrelevant.

There could be exceptions but nothing in your post suggests that exceptions apply.

When they obtain their own clients, bill them by invoice, and keep all the money, they are in business for themselves and the IC question doesn't arise.

There are plenty of resources online about IC vs employee, especially from the IRS itself.

irs independ contractor at DuckDuckGo

 

[PayrollHRGuy]

I believe under PA law the workers would be employees.

Employee or Independent Contractor

 

[Zigner]

No, you are their employer as long as they are performing work on your own clients, you bill your clients, and pay them a commission or hourly rate.

That piece of information is missing.

This is why they are employees:

You control the "how" which makes your other comments irrelevant.

While control of the "how" is an important factor, I believe you may be applying it incorrectly in this case. It's entirely possible for one to receive training on how something is to be done, yet is still an independent contractor. For example, if I contract with someone to make my widgets using my tooling any my work instructions, that doesn't necessarily make them my employee.

When they obtain their own clients, bill them by invoice, and keep all the money, they are in business for themselves and the IC question doesn't arise.

While true, the fact is that the OP is (well, could be) a client of the workers.

There are plenty of resources online about IC vs employee, especially from the IRS itself.

irs independ contractor at DuckDuckGo

I don't disagree with the information you have shared above, except to say that I don't think the OP has given enough information for us to come to a conclusion.
Based on the facts the OP *has* given us, it is entirely possible that the people in question are independent contractors, but a conclusion either way requires speculation.

 

[Sarah K.]

I'm not familiar with the abbreviation OP.

And I'm a little confused by this:

When they obtain their own clients, bill them by invoice, and keep all the money, they are in business for themselves and the IC question doesn't arise.

If they obtain their own clients, it won't have anything to do with me. But I think I might be reading this comment wrong.

 

[zddoodah]

I'm not familiar with the abbreviation OP.

Original poster (i.e., you).

 

[adjusterjack]

And I'm a little confused by this:

When they obtain their own clients, bill them by invoice, and keep all the money, they are in business for themselves and the IC question doesn't arise.

If they obtain their own clients, it won't have anything to do with me. But I think I might be reading this comment wrong.

That was my point, obtaining their own clients for their own business would avoid the IC question for work done for their clients.

I suggest you study the IRS material in the IRS results from my internet search. If you still cannot fathom whether your accountants are ICs or employees based on all the facts you can submit Form SS-8 to the IRS and the IRS will make a determination for you.

About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding | Internal Revenue Service (irs.gov)

 

[Tax Counsel]

No, you are their employer as long as they are performing work on your own clients, you bill your clients, and pay them a commission or hourly rate.

I disagree — I think we lack sufficient information to make this determination. However, the IRS has an excellent publication that discusses the factors it uses to make this determination: IRS Publication 15-A.

The problem here is that you have to look at all the factors together to form an opinion of whether one is an employee or not. No single factor is determinative. You've focused on just a few of them, and applied only the very limited info that we have been given.

One can dictate, for example, the outcome (the type and quality of work, etc) the contractor is to provide without necessarily making the relationship employer-employee.

You control the "how" which makes your other comments irrelevant.

(Underlining added.) Absolutely wrong. Again, no single factor trumps everything else.

 

[welkin]

If they obtain their own clients, it won't have anything to do with me. But I think I might be reading this comment wrong

There is nothing that says that a self-employed IC cannot also be an employee for some employer. So while these persons are working for you, they may well be employees and from what you posted I believe they are.

Most states use the ABC test to determine if a person is an employee or IC.

THE THREE-PART BASIC ABC TEST USED IN MOST LAWS STATES:
An individual performing any service shall be considered an employee and not an independent contractor, unless—

• the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact;
• the service is performed outside the usual course of the business of the employer; and
• the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

However, in April 2020 the PA supreme court dropped the B requirement from the test.A Special Touch v. UC Tax Services, Docket No. J-105-2019 (Pa. 2020)

The focus is now on the court held that to satisfy the second prong of this test (C), an individual must be "actually involved in" an independently established trade, occupation, profession, or business; merely having the ability to be involved will not suffice.

So simply put, your two bookkeepers do not have an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed. Therefore, they are your employees and you would be required to treat them as employees (withholding, workman's comp, Social security, etc..).

 

[PayrollHRGuy]

In the link I posted above...

Employee or Independent Contractor
A worker is considered to be an employee unless proven otherwise. To be an independent contractor both of the following must be shown to the satisfaction of the department:

• The individual has been and will continue to be free from control or direction over the performance of the services involved, both under the contract of service and in fact, and
• As to such services, the individual is customarily engaged in an independently established trade, occupation, profession or business.

 

[flyingron]

From IRS Pub 15A, re the HOW:

The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.
​

Welkin points out the "B" test, which even if it has been removed from the PA rules, still applies federally:

The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you'll have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.​

I'm tending to believe these accountants are employees.

 

[adjusterjack]

Both receive training from me on how to do the bookkeeping for my particular clients,..We use a project management tool to track the status of work and any deadlines.

That would imply an employer/employee arrangement.

 

[army judge]

That would imply an employer/employee arrangement.

Nothing unusual about training contractors or tracking their work hours.

 

[Zigner]

We have several clients that request milestone reports on a regular basis. If the job is important enough, I've even been asked to provide "inchstone reports".

 

[flyingron]

We have several clients that request milestone reports on a regular basis. If the job is important enough, I've even been asked to provide "inchstone reports".

I worked with a company whose slogan was "Tomorrow's technology, today." We internally referred to it as "Tomorrow's technology, sometime next month."

 

[adjusterjack]

I wonder if Sarah K will come back with additional information.