Lisa, the owner of a small company, decided that marketing the products of her machining company would benefit if the company had a product quality certification.

Employee or Contractor?

Lisa, the owner of a small company, decided that marketing the products of her machining company would benefit if the company had aproduct quality certification. She undertook the process to win a certification, which required the critical analysis and documentation of eachtask used in the processes. Her Uncle Jake had been an industrial engineer prior to his retirement 10 years ago and was capable ofundertaking that aspect of the certifying procedure. She would have able and reliable help and Jake would enjoy a measure of independence ifhe worked as an independent contractor. Lisa agreed to pay Jake a daily rate for each work day. They signed an agreement stipulating theindependent contractor status, pay rate and a monthly pay date. Jake agreed that he would pay any taxes. Family members were a littleconcerned about Jake’s physical ability to undertake this project that was expected to require at least a full year, and possibly two, to completethe work. As a result Lisa had Jake enrolled in the company health plan. Lest he get injured on the job, she also added him to the workers’ compensation insurance plan as a supervisor.

Jake and Lisa examined the methodology required by the certification system, agreed to what it required, and Jake set to work. Lisa assigned a data input clerical person to convert Jake’s notes because Jake wasn’t accomplished with a keyboard. The analytical work and documentationproceeded well. Jake did exercise some flexible scheduling to accommodate an occasional “sleep in.” Other employees referred to him as“Uncle Jake.” The only interruption in progress was a two-week period when Lisa had Jake oversee a night shift crew while the supervisor wason vacation.

Are there any reasons why the IRS would question Jake’s independent contractor status? What supports that status? Do any conditionscompromise that status?

What are “swing” factors that could establish Jake’s status one way or another?