Is your business a little busier than last year? There are reports all around that business is growing. Yet, some businesses are skittish about hiring.
In these times, a business may decide to hire an independent contractor – aka a freelancer/1099er – rather than an employee. This can be effective but can also be a landmine of issues if not done properly.
It is important.
As part of a national research project on employment taxes, the IRS is auditing 6,000 randomly selected companies ranging from large to small firms and even non-profits. The goal of the program, which is scheduled to last from 2010 to 2012, is to create a scoring system for employment taxes.
The audits are focusing on failure to file; fringe benefit issues; executive compensation, including stock options; and employees misclassified as independent contractors. The IRS has noted that there is no defined time period of years that will be covered during the audit.
The federal government estimates it will raise billions of dollars through tighter enforcement.
There are clear guidelines for what determines independent contractor status. These are right from the IRS web site:
Common law rules
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories:
•Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
•Financial: Are the business aspects of the worker's job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed and who provides tools or supplies.
•Type of Relationship: Are there written contracts or employee type benefits, such as pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?
So what happens?
If you have misclassified an employee as an independent contractor you need to be aware of the implications. You may find yourself responsible for employment taxes and penalties, as well for various benefits for which the misclassified employee may be eligible. These include vacation, sick pay, retirement plans, worker's compensation, health insurance and unemployment.
What can you do to protect yourself?
Employers can conduct their own audit to determine if independent contractors are properly classified. Also, there are experts who can help you to ensure that classifications are consistent with applicable law. A self audit should, at a minimum, include the following steps:
•Identify all independent contractors.
•Review written agreements to determine how the contractor relationship is structured.
•Review in detail the documentation related to how the contractor is paid.
•Consider the type of services performed by the contractor and whether employees perform similar services.
•Determine how the contractor performs the services, e.g., on company premises; with company provided necessary equipment; does the company direct when, where, and how the services are performed.
•Consider how long the contractor has performed services for the company and whether the contractor was engaged for a specific project or is performing services.
Employers should develop a formal procedure for the lawful hiring of independent contractors, establish guidelines for hiring contractors, and develop a written independent contractor agreement.
Many companies utilize 1099 contractors to supplement traditional W-2 employee workforces. If done correctly, this can be a useful method for controlling labor costs and engaging needed expertise.
Companies, however, either negligently or intentionally violate the law by misclassifying workers as contractors instead of employees. Be sure your independent contractors are truly independent.
