INDEPENDENT CONTRACTOR IN DEPTH
The Many Benefits and the Dangers
The following information is important in that if properly implemented it can prevent costly problems in the future operation of your small business.
Some small businesses utilize Independent Contractors as opposed to Employees, but have not set up the proper contracts and are not following the IRS guidelines. This can produce problems that you don’t need.
IRS GUIDELINES FOR BUSINESS OWNERS
Determination of Employee vs. Independent Contractor as viewed by the IRS
Top Ten Tips for Business Owners
Three characteristics are used for determination by the IRS: Behavioral Control, Financial Control, and Type of Relationship.
1. Behavioral Control covers facts that show if the business has the right to direct or control how work is done through instructions, training or other means.
2. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
3. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
4. If the business has the right to control or direct not only what is to be done, but also how it is to be done, then the workers are most likely employees.
5. If the business can direct or control only the result of the work done — and not the means and methods of accomplishing the result — then the workers are probably independent contractors.
6. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.
7. Workers can avoid higher tax bills and lost benefits if they know their proper status.
8. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 –Determination of 9. Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.
9. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976 — Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site.
CAUTION: Before filing the IRS Form SS-8, read the following:
After reading the IRS guidelines above, you will probably get the impression that the IRS is not friendly to the independent contractor. If so, you are correct!
Also be aware that if you send in the Form SS-8 (Determination of Worker Status), there is going to be a bias by IRS to determine that the worker is an employee and not an independent contractor. The bias will always be in favor of the IRS collecting more tax.
Common Law Employees
Because it is so important that you set your business up properly from the outset, here is another look from the standpoint of the employee. The following is a list of the factors that imply that an employee is a common law employee (as opposed to an independent contractor relationship) as viewed by the IRS.
1. The worker takes instruction from another employee.
2. The company provides worker specific training.
3. The worker’s services are integrated into the company (i.e. the worker is subject to the company’s control).
4. The worker must present work to the company in person.
5. The worker is not responsible for his or her own assistants.
6. The worker and company have an ongoing relationship.
7. The worker has set hours of work, indicating company control.
8. The worker is required to work full time.
9. The worker performs work on the company’s premises.
10. The company specifies the order in which worker services are to be completed.
11. The worker must submit regular written or oral reports to the company.
12. The worker is paid hourly, weekly, or monthly, not on commission or by the job as in the case of the independent contractor.
13. The worker is not responsible for his or her own business and traveling expenses.
14. The worker does not provide his or her own tools and materials.
15. The worker does not have a significant investment in facilities in which services are performed for the company.
16. The worker is not affected by profits and losses that result from services performed for the company.
17. The worker works for one company at a time.
18. The worker does not offer services to the general public.
19. The company maintains the right to discharge the worker.
20. The worker has the right to terminate his or her own services to the company at any time.
CAUTION: If contacted by the IRS regarding the status of your workers, do not respond until you consult with a tax specialist. Any contact with the IRS regarding requests for information should be in writing. Since the IRS created the 20 factors listed above, develop your case using them.
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Independent Contractor in Depth