Employing Independent Contractors: First thing to do is to make sure that your independent contractor is in fact an independent contractor. The key issue is who controls who, when, where and how a person does a job, project or work. The IRS looks at three main items: does the worker pay his/her own business expenses, are his/her services continuously available for the general public’s use and finally the manner in which the workers compensation/pay is determined.
Following is a list of some common law factors used by the IRS to determine the “status” of an independent contractor (if they meet any one of these they are an employee):
1. Does the person follow detailed instructions?
2. Is the person provided training at your cost?
3. The person’s services are integrated with your routine business operations.
4. The person’s services are rendered personally/directly.
5. You hired, supervised or paid the person’s assistants.
6. Your business relationship with the person extends beyond the scope of a given project.
7. You set the hours of work for the person.
8. The person works for you full time.
9. The person works on your premises. (This is not a strong point by itself).
10. The work sequence is set/controlled by you.
11. The person is required to give you regular oral or written reports.
12. The person’s compensation/pay is a wage or salary rather than a per-project fee.
13. You pay the person’s travel and/or business expenses.
14. You provide the tools and/or materials.
15. The person has no significant investment in the facilities used in performing services.
16. The person can’t realize a profit or suffer a loss as a result of services performed for you.
17. The person does not work for any other firm.
18. The person does not offer services to the general public on a regular basis.
19. You can discharge the person.
20. Your business relationship can be ended without liability.
If it is found that the independent contractor is in fact NOT an independent contractor your company will be subject to paying federal back taxes (State taxes as well), forced to pay penalties for non-compliance with minimum wage and overtime laws. In addition, possible non-compliance with health, retirement benefit requirements and state laws. In court, the burden of proving the status of an independent contractor rests solely on the hiring company. Even if a company wins in court it is often so costly that is forces many small businesses into bankruptcy.
You can find a copy of the IRS form SS-8 at this IRS link http://www.irs.gov/pub/irs-pdf/fss8.pdf . Just print it out fill it in and send it off for clarification from the IRS if the person is or isn’t an independent contractor. This will help keep you on track.
If you have any questions concerning form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
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