The Contractor Test; Do You Pass?
Virtual Assistants provide business to business services. They own and maintain their own businesses. So would you be surprised to find out that many of them are providing services in such a way that the IRS would actually classify them as ‘remote employees’ and as such their clients are in danger of owing taxes for them? Not only might you be surprised, I believe a large number of virtual assistants would be shocked to realize they fall in that group as well.
The IRS uses three main areas in which they look at control and independence in order to determine if you’re a contractor or an employee. Those three areas are:
- Type of Relationship
Each area is examined for certain factors which I’ll explain below.
Behavioral control refers to facts that show whether there is a right to direct or control how the virtual assistant does the work. A VA is considered an employee when the client has the right to direct and control the worker. The client does not have to actually direct or control the way the work is done – as long as the client has the right to direct and control the work.
You’re an employee if you are subject to the business’s instructions about when, where, and how to work, what tools or equipment to use, what order or sequence to do the work in. Employees are given highly detailed instructions. Employees are also subject to evaluation systems that measure the details of how the work is completed and are given detailed training on how to do the job, indicating that the job must be done in a particular way.
A contractor on the other hand receives less detailed instructions and is allowed to make the decisions regarding when, where and how the work is done. Any evaluation system used should measure only the end result of the work.
Financial control refers to facts that show whether or not the client has the right to control the economic aspects of the worker’s job.
When determining control and independence in the area of finances a number of items are looked at. Those items are significant investment, unreimbursed expenses, opportunity for profit or loss, method of payment and services available to the market.
For virtual assistants the services available to the market is something that should be looked at more closely, as many clients may not be clear about restrictions that they can impose.
An employee can be restricted from working for anyone other than the client or anyone else within the same field as the client.
As a contractor, a virtual assistant is free to seek out business opportunities, advertise and work in the relevant market. This means you are free to take on other clients within the same field.
3. Type of relationship
Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.
You may still be considered an employee even if you have a contract that states you’re a contractor if how you work together contradicts the role. An employee will enjoy benefits and a degree of permanency that a contractor will not have. You may also be considered an employee if the services that you provide are considered to be a key aspect of the business, since this makes it more likely that the client will have the right to direct and control your activities.
An example of this would be a law firm hiring an attorney with the intention 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.
As you can see, as a service provider it can be very easy to slip from contractor status to employee unknowingly, simply believing yourself to be providing good ‘customer service’. It’s up to us as virtual assistants to understand and set the correct boundaries in order to maintain contractor status. It not only benefits our business, but that of our clients as well.