Hiring independent contractors what every business owner must be aware of

Independent contractor or employee- which is the right classification? 

As an employer, you are required to pay payroll taxes withheld from your employee paycheck in addition to the employer taxes. For independent contractors, you need to issue a 1099 form by Jan 31st of each year. Therefore, there are different compliances to take note of based on the type of classification and as a business owner, you may come across this scenario quite often.

There may be a few special projects in your business, that may require you to hire an expert or someone with specialized skills. So, how do you know which is the correct classification?

The answer is that there is no set rule and it is based on various guidelines provided by IRS. Following are few guidelines to take note of:

 

1. The level of Control. An important factor in determining contractor or an employee is the relationship between the new hire and the business. 

•  The extent to which the worker/new hire can realize profit or loss.
•  How business compensates the worker? Is it regular pay alongside employees or if its project based etc.
•  Workers investment in the tools or facilities used in performing services. 
•  Scope or extent to which work makes his / her services available to the relevant market.

 

    2.Perception of the employee-worker Relationship

        How the employer and the worker perceive the relationship is also another key factor. 

• Does the employer provide employee type of benefits to its contractors like insurance, workplace benefits etc?
• Does the worker provide services that relate to regular/general business services of the company or if they are specialized services?
• How does the employer pay unreimbursed business expenses? Is it a different process for employees and independent contractors or the same?
• Permanency of relationship- is this project based, for a limited time or does it establish permanency.
• Are there any written contracts between 2 parties with clearly defined scope, timelines, and process. 

If independent contractors are compensated and provided the same level of benefits as employees, then there is a very high chance that IRS may require you to payroll taxes and cancel the independent contractor status. 

On the other hand, if the independent contractors are able to complete their tasks with least intervention from the employer and with minimal supervision, then they may be correctly being classified as independent contractors.

You can use IRS form SS8 to further assist with determining the correct status.

 

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Posted In: Tax

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