Much to the delight of both financial management firms and their clients alike, a major limitation that barred workers from serving as both employees and independent contractors within the same organization simultaneously has been lifted.
Thanks to an official inquiry submitted to the IRS concerning the possibility for someone to collect income both on company payroll as well as through accounts payable for work done elsewhere in the company, the agency has issued a ruling stating that given certain criteria are met, this practice is acceptable.
Ruling remains a case-to-case affair
Although the ruling could have major implications for those attempting to work in multiple departments within their company, it is by no means broad in its practical scope. The IRS will still look closely at the specific nature of each position and make judgments accordingly.
That said, the ruling is interchangeable between employee positions and contractor status. It isn’t just employees that can officially become contractors, but contractors can also be roped into employee status.
More power to finance managers
Although the IRS insists that each case will be dealt with separately and judged with strict criteria, this ruling still provides some wiggle room for account managers and finance staff handling individuals who are multi-talented in separate professional areas.
For instance, you may have a human resource manager who has video editing experience and is needed on a project down in the marketing department. With this new allowance, the officially employed HR manager who collects from payroll could be paid as a separate contractor through accounts payable.
Be prepared for more enforcement
With these changes making the window for allowance a bit more open, it’s important to determine any employment distinctions that might appear murky or questionable to either the IRS or the Department of Labor before they come seeking answers themselves since both organizations have made it clear that worker classification problems will be in their crosshairs in the coming months and years.
If you’re a business owner who doesn’t adhere to strict worker classifications, it is best to get any of these issues sorted out now with the proper documentation completed in full.
Educate yourself about IRS filters
Depending on the size of your company, you should be sure that the system of classification you employ should be standardized throughout every department when it comes to determining an employee from an independent contractor.
These three filter categories come straight from the IRS:
Does your organization maintain control over what the worker in question does and how they carry out that particular job or contracting duty? Do you have the right to control these things?
Are the financial aspects of that worker’s position handled by your firm? Things to think about here are: how is this worker getting paid? Are expenses being reimbursed? Who provides supplies?
3. Type of relationship
Are there any written contracts or employee type benefits such as pension plans, insurance plans, vacation pay, or other contractual elements that might play into an employee/contractor distinction?
This ruling certainly opens many doors for finance managing staff to allow employees to move more freely within their own companies and save on the expense of needless outside work. At the same time, this allowance will bring with it an extra level of enforcement geared towards mitigating potential abuses and lax policy. Be sure you are diligent in your determinations by keeping this information written down.
If you’re a business looking to prioritize your finances and are interested in hiring an outsourced accountant, contact us. Our start-up accounting and CFO services experts can provide you with personal guidance.