The trouble of handling payroll taxes is really testing the patience of a small business owner. The better way of doing business is hiring an independent contractor. However some precautions need to be taken keeping in view the stringent IRS scrutiny.
Over the last few years IRS is very strict on regulating the use of independent contractors. The recent launch of worker misclassification program and the data sharing agreements with 29 agencies are the proofs for initiates from IRS.
There is nothing wrong in thinking of reducing the burden of accountability for employment related obligations. When you hire independent contractors, it can generate a packet by making savings in payroll taxes, insurance, training costs and other benefit costs. However the main question IRS asks you is – how much control you exercise over them. Generally a person working for you is your employee unless you prove otherwise.
To avoid the risk of reclassification, here are some tips and tricks:
1. Independent contractors are the owners of their business and they will work for profit. So they should be responsible taking decisions. If your company happens to instruct them all the things relating to the work, continues to supervise on their expenses and makes investments in their businesses, it’s obvious that your company’s managing they show.
So if you are thinking of getting the work done through an independent contractor, just make a contract with the person for that particular assignment and leave everything else to the contractor. You need not control on their working hours and their expenses. Avoid giving specific instructions to accomplish the task. They should find out their own ways to complete the work.
2. The contractors, once appointed, should use their own tools and technologies. For this purpose they should make their own investment. It is their business and they should manage to procure their tools.
3. You need to follow a particular process to appoint and terminate them. You cannot fire them like your employees if they are unable to produce the results which you desired.
4. They will manage their own insurance or other coverage. Don’t extend any insurance or other facility which you usually provide to your employees.
5. Never ever compensate them on a weekly or monthly basis! You need to pay them on the basis of progress made in your assignment.
6. You should not make an agreement with them prohibiting them to take up assignments outside your business. They are independent after all and can take up any other work. If they do only your work in a particular year, that will be viewed suspiciously by IRS.
7. You should not provide them with staff from your business. They should be allowed to hire the staff from outside.
Usually you should enter into an agreement with them providing a detailed description of the services which the independent contractor is engaged to perform for you. The agreement should set the duration of time for such a contract or to perform the services. The nature of relationship between your company and such a contractor should be made very clear in the agreement. You can always include in the agreement penalties for non performance or defective performance of your job. You can also make a provision preventing the contractor from competition against your company for a period of two years after the termination of your contract.
As the IRS and other state agencies have prioritized and concentrated on the misuse of independent contractors, you should carefully examine the possibility of employee misclassification before proceeding to hire such contractors. If the labor law liability, employee benefits and potential tax consequences are significant, find out the most appropriate ways to eliminate or minimize them before proceeding.