Independent Contractors

Q. I would prefer to have my work done by independent contractors as opposed to employees. It seems it would be simpler for me as a business owner to work with independent contractors. Are there any major problems associated with this approach?

A. In a single word, the answer to your question is yes. Businesses get into trouble when the owner attempts to circumvent hiring employees by using independent contractors, here-in-after referred to as contractor(s). This is often done in an attempt to avoid having to withhold and remit income and social security taxes, matching employee’s social security payments, having to deal with workers’ and unemployment compensation matters, etc. If you, as the owner, want to avoid getting involved in these requirements you can do so in one of two ways other than going the contractor route. They are:

1. Get temporary help from an agency. Here you are on safe grounds because that agency takes care of the tax and other legal obligations. You still incur the costs, as these items are built into the rate you pay, but you escape the detailed involvement.

2. Have your workers as employees but obtain the services of a company that will administer all facets of your payroll and tax and insurance matters. Such companies are knowledgeable about all the intricacies of handling payrolls and all the laws and regulations regarding personnel matters. Accordingly, you can have your own workforce and still be relieved of the work involved and concerns you may have about "covering all the bases." Again, you will not eliminate these costs, as they will be passed on to you along with an administration charge, but you escape the detailed involvement and keep a permanent workforce.

If, however, you still want enter into a contractor arrangement with an individual directly, you had best be aware of some of the major concerns involved:

• The contractor is available to perform work in the market place. The degree to which the contractor makes his/her services available to the market place is important. It shows the individual to be "independent" and not exclusively available to you. This is referred to as "having their shingle out", which simply means that they advertise, network or otherwise make sure the general public is aware that they are available to provide their service to others.
• The contractor is currently performing services for others. This clearly demonstrates that the individual is "independent" and active in the market place.
• You should try to insure that, within reason, the contractor provides his/her own tools. In some cases this is not practical, but when practical have them provide their own tools and equipment.
• The relationship should be of a short duration. Avoid having the relationship take on any form of permanence. The longer the relationship lasts the more an employee/employer relationship develops until it finally becomes almost impossible to prove otherwise.
• You have minimum control over the contractor. This is a major consideration. You can tell a contractor what you want and when you want it; but, when you start telling him/her how to do it, where to do it, who is to do it, etc. it is no longer an arms length relationship and, in the eyes of the law, the individual become an employee.
• The contractor should have an established place of business. If the contractor does not have a place from which they normally conduct their business, rather they work out of your office; it gives an appearance of an employee rather than a contractor.
• Have a written agreement with the contractor This agreement should make it clear that the individual contractor has control over the methods or procedures to be used to do the work contracted for. Also state that the contractor is responsible to pay income and self-employment taxes on the amount earned. In addition, include that the company will provide an IRS Form1099 reflecting the amount earned, if that annual amount is $600.00 or more.

Some other areas to be aware of:

• If additional workers are needed, the contractor will hire them.
• Amount paid is based on what work is performed, not time spent.
• The contract price should include all costs, including meals, travel and, if appropriate, clothing.

Make certain that your actions with a contractor will not be construed, at some point in time, to have been that of an employer/employee. The consequences of being wrong are severe as you will not only be assessed for taxes you failed to withhold as an employer but other fees, such as interest on the taxes due and penalties. Therefore, to insure you are on solid ground contact the IRS, review the situation and get the necessary rulings that apply to your specific situation.