If you employ any number of independent contractors, the Department of Labor (DOL) has an interest in your business. Yes, yours. You should take it as seriously as they do.
Hiring such workers is attractive to companies looking for outside creative resources as well as those that have varying, seasonal, or event-based needs. It can help keep overhead low and is a great way to outsource work that is not central to their main line of business. It can also be a great way to find top talent on a specific, project-oriented basis.
Sounds nice, right? But there’s a big catch.
The legal definition of an independent contractor is constantly being redefined through legal means. While it can vary from state to state, it is trending toward a narrower definition across the board. 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?
It 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. Take our 5-minute worker classification self-audit here (pinky promise it’s easier and faster than any government-backed audit).
As self-employed workers, independent contractors (also known as freelancers, consultants, or 1099’s) have a different set of expectations than employees. Businesses engage them to do a specific job for an agreed-upon rate. Unlike a regular employee, they can move regularly from client to client and business to business. They are legally entitled to fewer company benefits. They are also responsible for reporting their own business income and paying self-employment taxes.
Best Practices When Engaging Independent Contractors:
- Engage contractors with an established business entity, name, and EIN
- Engage contractors who have multiple clients
- Have every IC provide a certificate of insurance, including general liability and worker’s comp insurance
- Have a signed project agreement specifying project length, compensation and liability
- Avoid training the worker, directing their work responsibilities, providing equipment, or defining their work schedules
Prevent an Audit With Airtight Contractor Payroll Processes
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? Engaging the right payroll partner mitigates most of the risks associated with engaging independent contractors. At PayReel, we assess each employment situation individually to make sure you are in complete compliance. Do you have questions about independent contractor status? You can trust PayReel to help you make the determination.