According to participants at a previous White House Conference on Home Business, by far the most significant concern regarding home businesses in America is disagreements regarding independent contractor classification. With all that is happening within the U.S. economy nowadays, you might think that arguing about contractor status is the last thing on the government’s to do list. But with a projected eight million independent contractors, 85% of whom don’t shell out adequate taxes according to IRS claims, reclassifying them as employees would definitely fatten up Uncle Sam’s piggy bank.
Who is most likely to suffer the implications of independent contractor reclassifications? The answer is you, the independent small business entrepreneur. In the event the IRS determines your contractor is really an employee, they might come after you for back Social Security, Medicare, and Unemployment taxes. Furthermore, if they feel you intentionally misclassified the contractor you may well be defending yourself against legal prosecution. Doing battle with the IRS is enough to bankrupt lots of independent small business owners.
Exactly how do you avoid disagreements regarding independent contractor status? Regrettably, there is no hard and fast rule that will assess if an individual happens to be a contractor or employee. The IRS looks at the relationship between the business owner and contractor and looks at the amount of financial and behavioral power the owner possesses. Then the IRS makes a judgment call. Even a signed contract detailing an independent contractor relationship is useless in the event the IRS establishes the service provider meets the part of an employee. Use the 7 strategies listed below to make sure your small business can easily beat any claims that your independent contractor is an employee.
1. Never have an independent contractor fill out an application. Preferably have the contractor present an offer or written proposal for a task. You can, obviously, ask for recommendations and require verification of applicable licenses or insurance. However, asking a contractor to fill out this data on a form, regardless how harmless it may seem, may lead the IRS to think the contractor was “applying” for a job.
2. You should definitely get a authorized project proposal. The obligations of an independent contractor should always be associated with specific tasks. For instance, an employee might “assist with accounting as required” while an independent contractor would “report the quarterly taxes” or “create a profit and loss statement.”
3. Pay per project, not an hourly charge. Certainly there are several exceptions for this rule. Experts like attorneys or accountants will often bill you depending on how long it took them to complete a project for you. It is generally accepted that law offices, accountants, and other professional providers with their own companies are independent contractors. The hourly amount could get dicey though when you’re managing Joe the painter. Joe might attempt to convince you to pay him hourly. Don’t do it! Joe’s earnings must be based entirely on the task at hand.
4. Don’t inform your contractor how or when to do their job. While it is sound business practice to share with your contractor in detail the specifics of the task you would like completed, the kind of components you want, the standard of work you expect, as well as the deadline for project conclusion, you can’t tell him methods to deliver the results or which hours he should work on it. That amount of control will cause the IRS to decide an employer / employee relationship exists.
5. Don’t supply equipment or even supplies. In the event you dislike loaning your items to others, you have a bon a fide reason to simply say no! The IRS expects independent contractors to acquire their own supplies and tools to complete the job. Loaning equipment or reimbursing contractors for supplies suggests that he could be being treated as an employee.
6. Specify a time when the business association will end. Most of the time this will be upon completion of the project. But imagine for an instant that you’ve got an office cleaning business. Maybe your company is accountable for cleaning twenty office buildings each week. In this particular situation, chances are that you’d contract out the cleaning jobs to independent contractors. Exactly how do you handle an ongoing assignment without looking like an employer? Establish a period of time during which the contract is valid. For example, your independent contractor is going to clean office complexes X, Y, and Z every week for a duration of one year. At the end of the year the current agreement will be renewed or would automatically end.
7. Do not monopolize your contractor’s effort. Most contractors are happy if you can supply plenty of work to fill their calendars. On the other hand, monopolizing your contractor’s schedule is dangerous. In cases where the contractor is so occupied performing work for you that he doesn’t have any free time for other clients, he looks increasingly more like an employee. A much better option would be to separated their work between multiple contractors and be sure every contractor has clients besides you.
In his testimony before Congress, the Acting Commissioner of Internal Revenue stated, “One of the most complicated and questionable issues in the employment tax area is meaning of ‘employee’.” In spite of his admission that the policies are extremely complicated, the burden remains on the home business owner to prove by a preponderance of proof that a supplier is definitely an independent contractor rather than an employee.