Can I Pay Independent Contractors a Discretionary Bonus?
You can, but it is not necessarily a good idea if you want to continue to maintain the person is a legitimate independent contractor and not an employee.
There are several different tests and factors that administrative agencies and the courts consider when determining whether a worker is legitimately an independent contractor. The IRS, for example, uses a three-prong approach, which examines the behavioral, financial and the type of the relationship the asserted independent contractor has with the company. And one of the factors the IRS will look at within the financial control test is whether the person was treated like employees with regard to the timing of wages and bonuses. Also, discretionary bonuses are generally benefits given to employees as a reward for past performance and as an incentive for future performance. If the bonus were part of a contract between the business and the independent contractor that would be one thing, but a discretionary bonus is commonly given to employees, not independent contractors who have no real loyalty and long-term expectation.
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