Independent Contractors are Raising Red Flags
By Nina Kaufman, Esq.It’s no secret that governments (Federal, state and local) are strapped for cash. One of the ways they’re seeking to fill the coffers is by cracking down more heavily on small businesses regarding their use of independent contractors (ICs).
Why? ICs are handy way for small businesses to expand and contract their workforce as needed. But it’s easier (and more lucrative) for the tax authorities to collect withholding taxes from one employer each quarter than to hope—and hope is the operative word—for ICs to pay in that same revenue when they file their tax returns months later.
This happened to a client of mine (call it “SB Training”). SB Training hired a colleague on a handshake as an IC to deliver a training program. SB Training paid the IC when the assignment was completed.
But when the IC filed for unemployment insurance (because the IC had been let go from her full-time job), she named SB Training as a place where she had worked in the previous year—and unwittingly sent SB Training down the rabbit hole.
SB Training said “She’s an IC!” The IC said, “I’m an IC!”
The taxing authorities said, “Too bad—the IC didn’t have an independent business because she worked full-time elsewhere … so wasn’t a proper IC.”
And because they now have integrated computer database networks, the Workers’ Compensation and Disability agencies were salivating like hyenas ready to pounce on an injured zebra, awaiting the final determination.
To keep tax enforcers at bay, you’ll want to document your agreements with all ICs. The IC determination process is complex, and you should seek expert help, but here are a few standard issues any IC agreement should include:
- A clear description of the task – Define the work to be performed, the timeframe for doing the work, and the IC’s specific responsibilities and reporting requirements.
- Payment terms – There should be no confusion here. State how much the IC will be paid, when payment will be due, and how payment will be transferred. Clearly state that no employment taxes are being withheld and that the IC is responsible for paying any taxes due.
- The contract term – The agreement should provide for termination of the contract, either at a pre-determined date or by a decision of either or both parties.
- Confidential information and intellectual property rights – if the IC will be privy to any of the company’s confidential information, or if the IC’s work could contribute to the production of new proprietary assets for the company, the agreement should confirm your ownership of that information and assets against any claims of the IC.
Tip: The IRS and many states have announced increased enforcement of IC misclassifications. There are several factors the IRS looks at when weighing wither a worker is an employee or independent contractor. Be familiar with them as you structure your work assignments.
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