Contract Employee vs. Independent Contractor
                     
                                        Are you an employee for Defense Base Act Insurance purposes
                                               but an Independent Contractor for Tax purposes?
Combat Support
Associates, CSA
dodges taxes for a
decade
WASHINGTON (AP) — When the
Pentagon announced an
obscure California company
had won a lucrative military
contract, no one mentioned any
plans for a Caribbean outpost
— a tropical shell the company
quickly created that allowed it
to duck millions in taxes and
deflect U.S. lawsuits.
It's legal, at least for now.
Contractors large and small
have been heading offshore to
shield piles of taxpayer dollars,
according to an Associated
Press investigation, but irate
lawmakers are thundering that
they'll put an end to it.
Almost a decade ago, a few
months after winning the deal
that has totaled more than $2
billion, Combat Support
Associates established its
subsidiary in the Cayman
Islands, a British territory and
tax haven.
read story here

MPRI dodges taxes
Shell Firms Shielded
Contractor
Boston Globe May 4 2008
by Farah Stockman
full story here
WASHINGTON - In March
2005, one of the Pentagon's
most trusted contractors -
Virginia-based MPRI, founded
by retired senior military leaders
- won a $400 million contract to
train police in Iraq and other
hotspots. Two months later,
MPRI set up a company in
Bermuda to which it
subcontracted much of the work.
It was not the first time that
MPRI executives had used a
shell company in an offshore tax
haven to perform government-
funded work. A year earlier,
MPRI headed a joint venture
that won a $1.6 billion contract
to provide US peacekeeping
forces in Kosovo and
elsewhere. Three months later,
MPRI set up a company in the
Cayman Islands to do the work.

Like MPRI's Bermuda
subsidiary, the Cayman Islands
company appears to have no
phone number, website, or staff
of its own there.


Blackwater Dodges Taxes
Special Note:  If your company is not paying their part of your SS and Medicare
Taxes then you are not an employee, they cannot claim you as an employee
when they purchase the DBA insurance they are required to get in order to even
get the government contracts.

So you thought the first $90,000 was tax free.  There are still the social security
and medicare taxes to pay and there is no longer a wage limit on these.  These
taxes will amount to 15%+ of your wages if you are classified as a contractor.  If
you are classified as an employee your employer is responsible for paying for
half of these.

Merely labeling a worker as an independent contractor is not enough. They must
actually be an independent contractor.

If you do misclassify an employee as an independent contractor, you must pay
the IRS all back-taxes owed, plus interest, plus penalty (12% - 35% of the total
tax bill).

Unlike an employee who is limited to workers' compensation benefits, an
independent contractor can sue you for negligence if they're injured on the job.

DETERMINING WHETHER JOE IS AN EMPLOYEE OR AN INDEPENDENT
CONTRACTOR

Unfortunately, as far as the various government agencies are concerned, there is not one single test that
determines whether Joe is your employee or an independent contractor. Even more difficult, it is quite
possible that for the purposes of one government agency Joe is considered to be an independent
contractor while for another he is
treated as an employee.

=> The IRS/Common Law "Control" Test

The IRS follows the common law "control" test for determining whether someone is an employee or
independent contractor. This test looks at 20 factors as being indicative (and only indicative) of whether
the person is an employee or independent contractor. The test basically involves a balancing of these
factors -- which way does the scale tip?

Here are the IRS factors:

1. Whether the worker can earn a profit or suffer a loss from the activity (if so, the more likely it is that the
worker is an independent contractor).
2. Whether the worker is told where to work (indicative of employee status).
3. Whether the worker offers his or her services to the general public (indicative of independent
contractor status).
4. Whether the worker can be fired by the hiring firm.
5. Whether the worker furnishes the tools and materials needed to do the work (indicative of
independent contractor status).
6. Whether the worker is paid by the job or by the hour (independent contractors are more likely to be
paid by the job; employees by the hour).
7. Whether the worker works for more than one firm at a time (indicative of independent contractor
status).
8. Whether the worker has a continuing relationship with the hiring firm (indicative of employee status).
9. Whether the worker invests in equipment and facilities (indicative of independent contractor status).
10. Whether the worker pays his or her own business and traveling expenses (indicative of independent
contractor status).
11. Whether the worker has the right to quit without incurring liability (indicative of employee status).
12. Whether the worker receives instructions from the hiring firm (indicative of employee status).
13. Whether the worker is told how to perform the work (indicative of employee status).
14. Whether the worker receives training from the hiring firm (indicative of employee status).
15. Whether the worker performs the services personally.
16. Whether the worker hires and pays assistants (indicative of independent contractor status).
17. Whether the worker sets his or her own working hours (indicative of independent contractor status).
18. Whether the worker provides regular progress reports to the hiring firm.
19. Whether the worker works full-time for the hiring firm (indicative of employee status).
20. Whether the worker provides services that are an integral part of the hiring firm's day-to-day
operations (indicative of employee status).

It is important to note that none of the above factors are, of themselves, determinative. The IRS will
balance all of the factors to determine which side of the equation is favored.

Internal Revenue Service
Independent Contractors vs. Employees  

Before you can determine how to treat payments you make for services, you must first know
the business relationship that exists between you and the person performing the services. The
person performing the services may be -

An independent contractor
A common-law employee
A statutory employee
A statutory nonemployee

In determining whether the person providing service is an employee or an independent
contractor, all information that provides evidence of the degree of control and independence
must be considered.

It is critical that you, the employer, correctly determine whether the individuals providing
services are employees or independent contractors. Generally, you must withhold income
taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on
wages paid to an employee. You do not generally have to withhold or pay any taxes on
payments to independent contractors.

Caution: If you incorrectly classify an employee as an independent contractor,
you can be held liable for employment taxes for that worker, plus a penalty.

Who is an Independent Contractor?
A general rule is that you, the payer, have the right to control or direct only the result of the work done by
an independent contractor, and not the means and methods of accomplishing the result.

Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at
$16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not
considered payment by the hour.  Even if she works more or less than 400 hours to complete the work,
Vera Elm will receive $6,400.  She also performs additional electrical installations under contracts with
other companies, that she obtained through advertisements.  Vera is an independent contractor.

How should I report payments made to independent contractors?

You may be required to file information returns to report certain types of payments made to independent
contractors during the year.  For example, you must file Form 1099-MISC, Miscellaneous Income, to
report payments of $600 or more to persons not treated as employees (e.g. independent contractors) for
services performed for your trade or business.  For details about filing Form 1099 and for information
about required electronic or magnetic media filing,  refer to information returns.

Who is a Common-Law Employee (Employee)?
Under common-law rules, anyone who performs services for you is your employee if you can control what
will be done and how it will be done. This is so even when you give the employee freedom of action.
What matters is that you have the right to control the details of how the services are performed.

To determine whether an individual is an employee or independent contractor under the common law,
the relationship of the worker and the business must be examined. All evidence of control and
independence must be considered. In an employee-independent contractor determination, all
information that provides evidence of the degree of control and degree of independence must be
considered.

Facts that provide evidence of the degree of control and independence fall into three categories:
behavioral control, financial control, and the type of relationship of the parties. Refer to Publication 15-A,
Employer's Supplemental Tax Guide for additional information.


Who is an Employee?
A general rule is that anyone who performs services for you is your employee if you can control what will
be done and how it will be done.

Example: Donna Lee is a salesperson employed on a full-time basis by Bob Blue, an auto dealer. She
works 6 days a week, and is on duty in Bob's showroom on certain assigned days and times. She
appraises trade-ins, but her appraisals are subject to the sales manager's approval. Lists of prospective
customers belong to the dealer. She has to develop leads and report results to the sales manager.
Because of her experience, she requires only minimal assistance in closing and financing sales and in
other phases of her work. She is paid a commission and is eligible for prizes and bonuses offered by
Bob. Bob also pays the cost of health insurance and group-term life insurance for Donna. Donna is an
employee of Bob Blue.

Statutory Employees
If workers are independent contractors under the common law rules, such workers may nevertheless be
treated as employees by statute ( statutory employees ) for certain employment tax purposes if they fall
within any one of the following four categories and meet the three conditions described under Social
security and Medicare taxes , below.

A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who
picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.
A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity
contracts, or both, primarily for one life insurance company.
An individual who works at home on materials or goods that you supply and that must be returned to you
or to a person you name, if you also furnish specifications for the work to be done.
A full-time traveling or city salesperson who works on your behalf and turns in orders to you from
wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments.
The goods sold must be merchandise for resale or supplies for use in the buyer s business operation.
The work performed for you must be the salesperson s principal business activity. Refer to the
Salesperson section located in Publication 15-A, Employer s Supplemental Tax Guide for additional
information.
Statutory Nonemployees
There are two categories of statutory nonemployees: direct sellers and licensed real estate agents. They
are treated as self-employed for all Federal tax purposes, including income and employment taxes, if:

Substantially all payments for their services as direct sellers or real estate agents are directly related to
sales or other output, rather than to the number of hours worked and
Their services are performed under a written contract providing that they will not be treated as
employees for Federal tax purposes.
Refer to information on Direct Sellers located in Publication 15-A, Employer s Supplemental Tax Guide
for additional information.

Misclassification of Employees

Consequences of treating an employee as an independent contractor.  If you classify an employee as an
independent contractor and you have no reasonable basis for doing so, you may be held liable for
employment taxes for that worker.  See Internal Revenue Code section 3509 for additional information.

References/Related Topics

Tax Topic 762 Basic Information
To determine whether a worker is an independent contractor or an employee, you must examine the
relationship between the worker and the business. All evidence of control and independence in this
relationship should be considered. The facts that provide this evidence fall into three categories
Behavioral Control, Financial Control, and the Type of Relationship itself.