If you work with independent contractors, you know the draw. You get to tap into outside creative resources and outsource work that is not central to your main line of business. It often allows companies to better meet budget.
On the surface, the barometer for identifying independent contractors is easy. They 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 projects and regularly move from client to client and business to business. Also referred to as freelancers, consultants and 1099’s, they report their own business income and pay self-employment taxes. Easy enough until you remember that nothing that involves the IRS is ever quite that simple.
Is Your IC really an Independent Contractor?
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 and thereby avoid, either knowingly or unknowingly, a bounty of state and federal taxes.
This is a deceptively complex question that’s important to answer “yes”, because the risk of your company facing an IRS audit has never been greater.
Best Practices to Prevent an Audit
• Work with contractors who have an established business entity, with a business name and EIN to which invoice payment is made.
• Make sure your contractor provides services to businesses other than your firm.
• Have workers provide certificates of insurance, including coverage for general liability insurance and workers’ comp insurance
• Have a signed per-project agreement for services between your company and the contractor. Each project should have a contract specifying project length, compensation and liability.
• Have workers include expenses such as reimbursements for travel, phone, meals and overtime wages in their day rate.
• An independent contractor’s services should not be integral to the day-to-day functioning of your business. They should not be functioning as a division of your company.
• Watch out for pen-ended, ongoing work. The longer a contractor is with you on a full time basis, the more they take on the role of an employee.
When working with your contractors
• Do not train a contractor, direct their work responsibilities or define their work schedules. Specific instructions on these aspects of a job imply an employee relationship.
• You cannot control any aspect of their work except the results.
• Independent contractors should, when feasible, be using their own equipment. This includes computers and phones.
• Do not provide any employment benefits. Independent contractor’s should have their own health insurance, pay their own employment taxes and not receive any corporate stock options.
• You contract on a per-project basis.
• Above all, keep in mind that this is a business-to-business relationship.
Prevent an Audit
Getting audited can be costly and time-consuming even for businesses that do everything by the book. How much are you willing to pay for employee misclassification? If you have any questions about independent contractor status, trust PayReel to help you make the determination.