The IRS says “No Blurring Allowed Between Employee and Virtual Assistant”

Posted by Owen McGab Enaohwo

Disclaimer: I am not an attorney or tax accountant, this is my own opinion only and should be taken as such; hence seek professional help regarding the issue discussed in this blog post.

Here’s the issue: If you hire regular employees, the Internal Revenue Service expects you to withhold taxes for them. And in the near future, you might also be expected to buy health insurance for them. If you’re hiring independent contractors, you’re not required to do any of that. And if you’re operating as you should, your virtual assistants will be regards as independent contractors, not employees.  Unfortunately, many companies are starting to blur the line. They’re calling someone a virtual assistant or a contractor, while at the same time, the IRS considers them an employee of the business.

Let me give you an example of one I saw just recently. There is a website that allows businesses to post projects that they need help with. These are things such as graphic design, typing, writing, etc. The website owners claim that the people providing these services are independent contractors or freelancers. But the IRS has begun looking warily at these types of sites, because they offer time management software for the person doing the hiring to use. This program is supposed to be turned on by the writer or designer when he’s working. It allows the person hiring him to monitor him and make sure he’s working when he’s supposed to be working.

Sounds good, right? Sure—except that one of the characteristics that the IRS gives of an employee is that they are required to work very specific times during the day, as dictated by their boss. Contractors on the other hand, have more liberty to set their own hours.

I want to explain to you, using the IRS’s own website, what they consider to be the difference between an employee and a virtual assistant or other contractor.  For future reference, you can see this for yourself on the IRS website at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html.


Questions that the IRS might ask you about your team members:

  • Behavior. They’ll ask if your business controls everything that the worker does and how he or she does his or her job.
  • Finances. They’ll ask if the business aspects of the virtual assistant’s job are controlled by you. In other words, do you provide the tools they need for their job, or do they provide their own? If they provide their own tools, this is evidence that they are independent contractors, and not employees.
  • Kind of Relationship. Is there a written contract? If so, this indicates that the person is a contractor. On the other hand, if there are things such as pensions or vacations allotted to them, this indicates the person is an employee.
  • Place of Work. While not determinative in itself, if you provide an office for the person, this gives the IRS strong evidence that he or she is an employee. Similarly, though, even if you specify where they must work, this would indicate that the VA is possibly an employee. Allowing the person to decide for him or herself where to work is evidence that they are an independent contractor.
  • And finally, hours of work. If you have a requirement that the person work specific hours, this at least suggests that he or she might be an employee. Usually, contractors are only told what they must accomplish during the day or week—but may choose when they do the work.

That last one, regarding hours, has some flexibility to it. For instance, there is a growing self-employment trend that involves home-based contractors answering phones for other businesses. In fact, this is a prime duty for which you might hire a virtual assistant. If this is the case, just make sure that all of the other areas clearly indicate that the person works for him or herself and is not an employee.  That means have it clearly spelled out in a contract, allow them to decide where they work, make them buy their own materials and tools, and so forth. And if there is any flexibility at all as to when she must answer the phones, so much the better (for instance, telling her only to answer phones when possible, but to return messages if she’s not available at that time).

Questions for you:

  • What does your business do to keep independent contractors distinct from employees?
  • Do you think the IRS has any business setting such guidelines for hiring either an independent contractor or an employee?
  • Do you think I clearly explained the IRS’s position on independent contractor VS Employees? If not please kindly highlight my mistake?