There’s a battle playing out in court over which workers can be classified as independent contractors versus employees. The legal wars demonstrate one important fact for employers: The IRS takes the practice of hiring independent contractors very seriously. That means you should, too.
Independent Contractors (ICs) are self-employed and hired to do a specific job. They 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 those companies looking for outside creative resources, and 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 confidently be able to answer “yes”, because the risk of facing an IRS audit has never been greater.
Best practices when working with an independent contractor:
- Contractor has an established business entity, with a business name and EIN
- Your contractor provides services to other businesses outside your firm
- IC provides certificates of insurance, including at the least coverage for general liability insurance and worker’s comp insurance
- You have a signed per-project agreement for services between your company and the contractor
- Independent contractors work for multiple clients
- Projects have a contract specifying project length, compensation and liability
- Independent contractor does not function as a division of your company
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 with contractor payroll solutions
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.