Keeping It Legal
In an effort to contain costs and maximize
productivity, many business owners have traditionally
found it extremely worthwhile to hire independent
contractors instead of employees. Among the many
advantages: not having to worry about withholding for
taxes, worker's compensation payments, Social Security,
Medicare, and unemployment compensation; enjoying the
benefits of reduced taxes; and not having to pay fringe
benefits. Furthermore, using independent contractors
allows an employer to have additional personnel when
needed, without having to pay for extra full-time
Unfortunately, merely calling a worker an independent
contractor does not make it so. In the past few years,
the Internal Revenue Service and various state agencies
have launched campaigns to locate and reclassify workers
whom employers have incorrectly labeled independent
contractors. Their goal is to raise more taxes as a
result of the reclassification, both by the taxes and the
Government agents routinely go into companies and
audit them to determine whether their current
classifications as independent contractor are appropriate
and whether proper filings have been made. In cases where
infractions are discovered, employers often end up paying
hefty fees and penalties. It is, therefore, to your
benefit as a business owner to know these IRS rules.
It is often difficult to tell whether a worker is an
independent contractor or an employee. At first blush,
the issue is one of control, that is, whether the worker
is subject to the control of the employer. The
more control an employer exerts over a worker, the more
likely an employer/ employee, and not a
contractor/subcontractor, relationship will be found.
The IRS relies on the following twenty factors to
determine whether someone is an independent contractor or
an employee. No one factor is determinative. What matters
is how much cumulative control the employer exerts over
- Instruction, training, integration, services
- Hiring/firing and payment. Continuing relationship.
Set hours of work. Full-time required.
- Doing work on employer's premises. Order per sequence
set. Oral or written reports.
- Payment by hour, week or month. Payment of business
and/or travel expenses .
- Furnishing of tools and materials. Significant
investment. Realization of profit or loss.
- Working for more than one employer. Making services
available to the public.
- Right to discharge the worker. Right of worker to
Whether you have mislabeled a worker intentionally or
unintentionally, you will find that the penalties
associated with reclassification can be catastrophic. In
addition to having to pay back taxes, penalties and
interest may also be assessed.
There are precautions you can take to avoid having
your independent contractors incorrectly labeled by the
government as employees. It is best to have a written
contract that is signed by both parties. This agreement
should clearly state that:
- The employer does not have the right to control the
methods by which the worker will accomplish the
- It is the worker's obligation to pay his or her own
income and self-employment taxes.
- The worker will provide his or her own liability,
worker's compensation, health and disability
- The worker will receive a 1099-MISC at the end of the
year in order to report any money paid.
- If any additional workers are needed for the project,
it will be the worker's responsibility to hire and pay
for the additional help.
- The worker will provide his or her own tools,
equipment, supplies, etc.
- The worker has the right to accept other employment
and does not work for the employer's company
- The worker will be paid for the work done, and not
according to the amount of time that is spent on the
- Any costs of meals, transportation and clothing are
the sole responsibility of the worker.
- The worker cannot be "laid-off" and can be terminated
only for not fulfilling the contract.
- The worker's hours will not be set by the company.
Rather, starting and completion dates for the project
will be set.
- The worker will not have an office space on the
employer's premises for use on a regular basis.
- The worker will not be given other tasks by the
employer to fill in time. If there is additional work, it
will be set up as a separate project with separate terms
and separate compensation.
In addition, if the worker has his or her own
corporation with its own stationery, business cards, and
advertising materials that are used for other jobs,
chances are that he or she will be more likely classified
as an independent contractor. (Please note that having a
separate corporation may not guarantee that a consultant
will be considered an independent contractor. If in
doubt, please consult an attorney!)
Working with independent contractors can be a smart,
cost-effective means of getting the work out for many
small businesses. However, the hiring issues involved are
complicated. Each situation must therefore be viewed as
unique and dealt with accordingly. So, if you have any
questions concerning the status of a worker, you should
be prepared to discuss them with your attorney or
This pamphlet is for informational purposes only. You
should consult with an attorney regarding your specific
© Copyright 2012 Shimberg and Crohn, P.C.
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