Forget the kinder, gentler IRS. If you're an employer with workers you designate as independent contractors and pay on Form 1099, you'd better make sure the government agrees with the workers' status. Otherwise, you could face assessment of Social Security back taxes, FICA and unemployment insurance, workers' comp, and disability payments, plus penalties and interest that may nearly equal the tax amount. Think you can sneak by? Just keep in mind that in December 2000 Microsoft agreed to pay $96.9 million to settle a class-action lawsuit brought by employees whom Microsoft had deemed temporary but who had performed the same work as permanent employees--and didn't get those golden stock options (see Internet Week's "Temp Workers Win Big Against Microsoft".

The government uses a number of factors to determine a worker's status, but the underlying principle is one of control. The IRS looks at three areas: behavioral control, financial control and the parties' relationship.

>> Behavioral control. Do you tell the worker when, where and how to perform job functions? Where to purchase needed supplies? What training must be taken? If an employer dictates how to achieve the desired result rather than just being concerned with the finished product, an employer-employee relationship may be established.

>> Financial control. There are five areas to examine here. First, look at unreimbursed business expenses; independent contractors generally are less likely to be reimbursed. Another factor is how much the worker has invested in supplies and facilities. Also, does the contractor advertise his or her services to others? Method of payment is also an issue: A regular wage usually equals a regular employee. Finally, independent contractors know well that they do not always make a profit. If a profit is guaranteed, this indicates a deeper relationship.

>> Type of relationship. Does the business offer the worker benefits, such as a pension or sick days? Is the relationship considered permanent? Are the services provided key to the business or presented as being produced by the business?

If you answered "yes" to any of these questions, and especially if you do not have a written contract, you should consult an attorney, who may be able to help you avoid penalties. How? By advising you on how to turn yourself in to the IRS, which will determine a worker's status after you or the worker files Form SS-8 (to download this form, go to ftp.fedworld.gov/pub/irs-pdf/fss8.pdf). In addition, you can find a copy of IRS Publication 15-A, Employer's Supplemental Tax Guide, at ftp.fedworld.gov/pub/irs-pdf/p15a.pdf.
--Lorna Garey