The working world isn’t what it used to be. With mobile technology widely available and so many jobs lost following the 2008 financial crisis, many workers have gone solo. These independent contractors can be a great boon to employers looking for expertise on a short-term basis. But they also bring the risk of worker misclassification — and unwanted IRS attention.
Employment laws don’t require you to pay independent contractors minimum wage or overtime — or provide them with any of the employee benefits you may provide employees. Moreover, you don’t need to pay the employer portion of Social Security and Medicare (FICA) taxes or withhold federal, state and local income taxes or the employee portion of FICA taxes.
But making the distinction between an independent contractor and an employee can be tricky. And if you choose incorrectly, the IRS could hold you liable for the taxes that you should have paid or withheld for that worker — and penalize you for not having done so.
The distinction between employee and independent contractor typically is determined by the amount of control the company has over the way in which the person works and by the support given to that worker.
To steer clear of IRS trouble, explain your desired results to the independent contractor and provide a deadline, but leave how, when and where the work is done to the worker. Be sure that the worker uses his or her own transportation, equipment and supplies.
In addition, require invoices. Independent contractors should give you a total cost estimate for their work, rather than just an hourly or monthly rate. Ask them to submit invoices on completion or, if the work takes more than a month or two, a series of invoices. At year end, file a Form 1099-MISC for each contractor to whom you paid at least $600 during the year.
Look for professional operations as well. Independent contractors should have their own workspace and resources. Like other businesses, they should market their services and carry business insurance. Use those who work for companies other than yours. If a contractor’s tax return includes only one Form 1099-MISC, the IRS might challenge his or her status.
Be mindful of industry norms, too. The IRS knows that some industries hire independent contractors more than others. For example, builders often hire independent carpenters, electricians and other tradespeople. If your industry doesn’t typically use independent contractors, diligently follow the basic control and support rules as well as those regarding invoicing.
Finally, consult an employment law attorney to develop a policy for hiring independent contractors, and have him or her prepare work-for-hire contracts.