Independent Contractor Cheat Sheet

Independent Contractor Cheat Sheet Can I just hire someone as an Independent Contractor? This is a great question with a big answer, and it requires y...
Author: Lewis York
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Independent Contractor Cheat Sheet Can I just hire someone as an Independent Contractor? This is a great question with a big answer, and it requires you understand what makes someone an independent contractor “Misclassifying someone as under the law. You may not realize it, but merely calling an independent contractor is someone an independent contractor or signing a contract with now one of the number one someone is not enough. Misclassifying someone as an costliest mistakes you can independent contractor is now one of the costliest mistakes you make as a business owner.” can make as a business owner. That is because companies who misclassify workers as independent contractors do not withhold taxes, pay Social Security or Medicare taxes, or provide workers with employee benefits. This translates into a BIG tax loss for Federal and State collectors and big trouble for employers who aren’t getting it right. In 2010, the Department of Labor (“DOL”) began an $11 million “Misclassification Initiative” to reward states that are the most successful or improved at detecting and prosecuting employers who fail to pay the appropriate taxes due to worker misclassification. One-third of the states, including California, Colorado, Connecticut Delaware, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Pennsylvania, Rhode Island, Vermont, and Wisconsin have followed through with increased penalties and new regulations about misclassification. Massachusetts employers need to be especially careful, as they have the strictest laws in the country. In Massachusetts, almost NO workers qualify as independent contractors, and no contractor in that state may perform any type of work that is similar to work performed by employees. The IRS also initiated similar programs that are expected to yield seven billion dollars over the next ten years. This means businesses can no longer “get by” by guessing which employment laws apply to them. You have to get it right before you get audited. What makes someone an Independent Contractor? There is no black and white answer. Classifying an independent contractor can be confusing because it depends on a number of factors. Furthermore, different rules and regulations have different tests, and each state may have its own criteria. The good news is that we can provide a common approach and basic factors to steer you in the right direction. The basic factors common to most employers: 1. Independent contractors commonly work for several businesses, not just one 2. They should provide their own tools and resources 3. The hiring entity should exercise a low level of control over the contractor; for example, the focus should be on the contractor’s completed output, and not on how he or she does the work

4. Independent contractors should set their own hours of work within general guidelines 5. The method of compensation typically will be on a project basis – for a certain amount of product or service – rather than an hourly basis. 6. They cannot perform the primary work of the practice. Note: How long they work for you is NOT relevant to the determination. Whether the person works for you for one day or one year makes no difference. Practice Tip: Be careful of the lure of past practice. Even though you may have classified the same or similar positions in the past as an independent contractor, working arrangements typically change over time. Be certain to evaluate the current status of the position in light of these factors. How would the government find out? There are any numbers of ways, including random and triggered audits. Also, when a wrongly classified worker is audited for not paying their taxes, the IRS typically looks to “properly” reclassify them as an employee, then seeks payment for all unpaid taxes from you, not the contractor/employee. Need a more in-depth analysis? There’s a lot more to it. If you have a particular case, you may want to follow this one down the rabbit hole a bit further. Keeping a record of your analysis for each worker is the best practice. That way, if there is a question about whether you have properly classified a worker, you can make the argument that you attempted in good faith to properly classify and have the opportunity to avoid certain penalties. The more control the business has over the means of performing the work, the more likely the worker is an employee. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. (1) Behavioral control. Facts that show whether the business has a right to direct and control how the worker performs his job functions: • Instructions to the worker. An employee is generally subject to the business's instructions about when and where to do the work, what tools or equipment to use, what workers to hire or to assist with the work, where to purchase supplies and services, what work must be performed by a specified individual, and what order or sequence to follow. The key consideration is whether the business has retained the right to control the details of a worker's performance, how he or she is to achieve the expected results, or instead has given up that right. The more control over the means of work, the more likely the worker is an employee. • Training to the worker. An employee may be trained to perform services in a particular manner. Independent contractors normally use their own methods. (2) Financial control. Facts that show whether the business has a right to control the financial aspects of the worker's job include: • The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees.

• The extent of the worker's investment. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status. • The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out other business opportunities. They often advertise, maintain a visible business location, and are available to work in the relevant market. • How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid a flat fee for the job. However, it is common in some professions to pay independent contractors hourly. • The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss. (3) Type of Relationship. Facts that show the parties' type of relationship include: • Written contracts describing the relationship the parties intended to create. • Whether or not the business provides the worker with employee-type benefits such as insurance, a pension plan, vacation pay, or sick pay. • The permanency of the relationship. If employers engage the worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the employer's intent was to create an employer-employee relationship. • The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the employer's regular business activity, it is more likely that the employer will have the right to direct and control his or her activities. Note: Be careful of the lure of past practice. Even though similar positions or the same position may have been classified as an employee or independent contractor in the past, working arrangements typically change over time. Therefore, be certain to evaluate the current status of the position in light of these factors. How to Obtain an IRS Determination When in doubt about the status of a particular worker or class of workers, an employer or a worker may request an IRS determination preapproval by filing form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. A Form SS-8 determination may be requested only to resolve federal tax matters. The party requesting a determination must file an income tax return for the years in question before a determination can be issued. A determination will not be issued for a tax year for which the statute of limitations on the tax return has expired. The statute of limitations expires three years from the due date of the tax return or the date filed, whichever is later.

Binding determinations (or in some cases nonbinding information letters) are usually issued in about 120 days. For additional information on this test, see the IRS Guide for 2012, starting at page 7: http://www.irs.gov/pub/irs-pdf/p15a.pdf Documenting Independent Contractor Status Ideally, an employer should develop the facts necessary to support the worker classification at the time of classification. Employer should consider requesting and collecting documents from potential workers proving they are indeed independent contractors. For example, the following documents can be helpful to support an independent contractor status: • The worker's employer identification number • Copies of any business licenses, if required, and any professional licenses • Certificates of insurance, including general liability insurance and workers' compensation insurance (if the worker has employees) • The worker's business cards and stationery • Copies of any advertisements done by the worker (e.g., yellow pages) • A copy of the worker's white pages business phone listing, if available • A copy of the worker's invoice form to be used for billing purposes • A copy of any office lease or other evidence of the worker's office or workplace; • The worker's unemployment insurance number issued by the state unemployment insurance agency (if the worker has employees) • Copies of 1099s issued to the worker from other companies for which he or she has performed work • The names and salaries of any assistants the worker has used on previous jobs for the past two years and proof that the worker has paid them • Verification that the worker owns and maintains his or her own equipment and supplies necessary to perform the duties required under the agreement

Independent Contractor Checklist Employers may use the following checklist to classify individuals as independent contractors. If more than 3 questions are answered yes, it is likely the person would be properly classified as an employee instead. Factors Which Show Control

Yes/EE

No/IC N/A

1.

Worker must comply with instructions on how to do their job.







2.

Worker is trained by person hired.







3.

Worker cannot hire or fire his or her own assistants.







4.

Work relationship is continuous or indefinite.







5.

Work hours are preset by the business.







6.

Worker must devote full time to this business.







7.

Work is done on the employer's premises.







8.

Worker cannot control order or sequence of work.







9.

Worker is paid at specific intervals.







10. Worker's business expenses are reimbursed.







11. Worker is provided with tools or materials.







12. Worker has no significant investment in performing his/her services. 13. Worker has no opportunity for profit/loss.













14. Worker is not engaged by many different firms; or is required to work only for the one company. 15. Worker does not offer services to public, nor advertises the services he or she provides. 16. Worker may be discharged by employer without penalty.



















17. Worker is paid directly, not to the worker’s company.







18. Worker is provided benefits such as vacation, pension plan, and bonus. 19. Worker is required to sign the Employee Handbook, W-4, or other Employee forms. 20. Worker provides services that are a key aspect of the business.