The court battle over which workers can be classified as independent contractors versus employees does affect your business whether you want to think about it or not. Whatever the IRS makes a priority of a topic will soon be the focus of audits, too. In short: that means anyone with workers must be well-versed on worker classification.
Independent Contractors (ICs) are self-employed, hired to do a specific job, and receive payment only for the work performed. Unlike a regular employee, they pick their jobs and regularly move from client to client, business to business. Also referred to as freelancers, consultants, and 1099’s, they report their own business income and pay self-employment taxes.
Hiring an IC is attractive to companies looking for outside creative resources who want to outsource work that is not central to their main line of business. The work is project-oriented and is typically completed in a short amount of time. It’s also easier on the budget to pay your IC as a vendor, not as an employee.
Sounds nice, right? But there’s a big catch.
The IRS has very strict guidelines that define true business-to-business relationships. These guidelines are meant to prevent firms from misclassifying would-be employees, thereby avoiding a bounty of state and federal taxes.
Is your IC really an independent contractor?
This is a deceptively complex question. It’s important to justify your “yes” because of the high audit risk associated with loose practices around independent contractors.
Best Practices:
- Contractor has an established business entity and EIN
- Contractor provides services to multiple clients
- IC provides certificates of insurance, including general liability insurance and worker’s comp
- Company and contractor have a signed services agreement
- Agreement specifies project length, compensation and liability
When working with your contractors:
- Do not train a contractor, direct their work responsibilities or define their work schedules
- Independent contractors should use their own equipment
- Do not provide any employment benefits, such as health insurance and corporate stock options
- Contract on a per-project basis
- Keep in mind that this is a business-to-business relationship
Prevent an Audit/Years of Headaches
Audits are costly and time-consuming even for businesses that do everything by the book. How much are you willing to pay in time and hassle for employee misclassification? If you have any questions about independent contractor status, trust PayReel to help you make the determination.
We screen each employment situation carefully to assess the entire relationship to make sure you are in complete compliance. Call us at 303.526.4900 or email info@payreel.com.
