Independent Contractors: What You Don’t Know Can Hurt You

Looking to avoid the hassle of hiring an employee? Here’s what you should know before you engage an independent contractor.

It’s the moment many sole proprietors dream of: your business is getting so busy with new orders/clients that you are considering hiring someone to help you manage the demand for your product/services. Congratulations!

Before popping open a bottle of champagne, you recall what your friend told you about hiring an employee: it’s a paperwork nightmare, costly to the employer and exposes you to all sorts of liability. Then you remember what another friend told you: “Hire a freelancer. Easy breezy.” You sip the champagne and revel in your success and savvy, and begin drafting a job posting for an independent contractor.

Problem is, hiring an independent contractor (“IC”) can also expose you to liability, including costly fines by the IRS. How can a business owner get the help she needs while mitigating the risk?

How Do You Know Which is Best?

For many business owners, the common thread is the need for some help. Problem is, there are many other variables beyond that common thread that will determine whether an employee or an IC is best for you.

While an independent, subjective review by an employment/business attorney is best, the following guidelines can serve as a starting point in determining whether an employee or an IC is best for your business:

If you need:

  • a worker to perform work on-site
  • a worker who works hours and per a schedule that you set
  • a person who is expected to work a variable work schedule, or who is “on call”
  • a full-time worker
  • someone to perform work on machinery or equipment that your business owns
  • someone who does work according to your detailed direction and oversight

…then you probably need to consider hiring an employee.

However, if you can meet your need for help with:

  • a worker who can perform work off-site, or anywhere, for that matter
  • a person who can perform work off equipment s/he owns
  • someone who dictates her/his own schedule, as long as work is completed
  • someone on a project-by-project basis, not based on hours worked
  • a person who needs little direction on how to perform work, but needs only general guidance on what work should be performed

…then you may be in a good position to hire an IC.

Know the Rules

The IRS has set forth a list of 20 some-odd factors that it uses in making a determination as to whether a worker is truly an employee or an IC. Keep in mind that it matters little whether you call or consider someone an IC; if the worker conducts business in such a way that suggests an employer/employee relationship, the IRS could determine that person to be your employee, and hold you liable for all the obligations (and hefty fines) that go with misclassification.

While it’s best to consult with an employment attorney to learn more about how to safely and properly engage an IC (to avoid violating the rules), here are some threshold questions to consider:

1. Does the arrangement allow the worker to profit from/suffer loss as a result of the work s/he does for your firm?

2. Can the worker set his or her own hours? Can s/he work for other companies or is s/he basically prevented from serving other clients?

3. Does the worker own the equipment s/he will be working on? Or are you requiring that the person work on your business site, on your equipment?

4. Do you plan to train the worker? Do you pay for that training?

5. And finally, how much direction will you give the worker? Do you dictate how he gets the work done, or are you merely giving him a goal and allowing him to direct how that goal is met?

Mistakenly classifying an employee as an IC can end up costing you through significant fines and penalties. There are 20 factors currently used by the IRS to determine if you in fact have an employee (even if you call him/her an IC). Remember too that individual, subjective circumstances guide the IRS; there’s no boilerplate, hard-line rule for all situations. What is deemed acceptable for one business may get another business in hot water with the tax police.

Seek out legal counsel to determine how you can get the help you need while protecting yourself against liability. In the end, the money you invest in proper counsel will be a small price to pay to avoid the hefty fines and penalties that can result from misclassification.

 

 

 

 

 

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