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5 Examples How IRS Determines If a Construction Worker Is an Employee

Posted by Shawn McCadden on Tue, Jan 21,2014 @ 06:00 AM

5 Examples of How the IRS Determines If a Construction Worker Is an Employee

How does the IRS Determine If a Construction Worker Is an Employee


A good number of contractors are deciding not to hire employees as the economy and their workloads improve.  Instead, they plan to hire sub contractors to get the work done. I have talked with many of these contractors and the majority of the ones I spoke with are putting themselves at significant risks.  If you don’t know how to properly differentiate between an employee and an independent contractor you better find out.  If the IRS or another government agency decides a worker is an employee, not a sub contractor, it could cost you and your business big time.

Below are some examples of how the IRS would determine whether a worker is an employee or an independent worker. This information comes from a 2014 IRS Publication titled “Employer’s Supplemental Tax Guide”.

I hope these examples will help you properly classify your workers and help you avoid unneeded fines and sleepless nights.


Example 1:

Jerry Jones has an agreement with Wilma White to supervise the remodeling of her house.

The details: She did not advance funds to help him carry on the work. She makes direct payments to the suppliers for all necessary materials. She carries liability and workers' compensation insurance covering Jerry and others that he engaged to assist him. She pays them an hourly rate and exercises almost constant supervision over the work. Jerry is not free to transfer his assistants to other jobs. He may not work on other jobs while working for Wilma. He assumes no responsibility to complete the work and will incur no contractual liability if he fails to do so. He and his assistants perform personal services for hourly wages.

IRS Says… 

Jerry Jones and his assistants are employees of Wilma White.


Example 2:

Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites.

What is an Independant ContractorThe details: He uses his own tools and performs services in the order designated by the corporation and according to its specifications. The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers' compensation insurance on him. He does not have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time.

IRS Says… 

Milton Manning is an employee of the corporation.


Example 3.

Wallace Black agreed with the Sawdust Co. to supply the construction labor for a group of houses.

The details: The Company agreed to pay all construction costs. However, he supplies all the tools and equipment. He performs personal services as a carpenter and mechanic for an hourly wage. He also acts as superintendent and foreman and engages other individuals to assist him. The company has the right to select, approve, or discharge any helper. A company representative makes frequent inspections of the construction site. When a house is finished, Wallace is paid a certain percentage of its costs. He is not responsible for faults, defects of construction, or wasteful operation. At the end of each week, he presents the company with a statement of the amount that he has spent, including the payroll. The company gives him a check for that amount from which he pays the assistants, although he is not personally liable for their wages.

IRS Says… 

Wallace Black and his assistants are employees of the Sawdust Co.


Example 4.

Bill Plum contracted with Elm Corporation to complete the roofing on a housing complex. 

IRS Independent Contractor ruleThe details: A signed contract established a flat amount for the services rendered by Bill Plum. Bill is a licensed roofer and carries workers' compensation and liability insurance under the business name, Plum Roofing. He hires his own roofers who are treated as employees for federal employment tax purposes. If there is a problem with the roofing work, Plum Roofing is responsible for paying for any repairs.

IRS Says… 

Bill Plum, doing business as Plum Roofing, is an independent contractor.



Example 5.

Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours.

The details: 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.

IRS Says… 

Vera is an independent contractor.


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Topics: Subcontractor Considerations, Legal Considerations, Government Regulations