How to Avoid Incorrectly Treating a Worker as an Independent Contractor.
The penalties for incorrectly treating a worker as an independent contractor are significant. Consider these factors before deciding whether to treat a worker as a contractor.
Many business owners want to use independent contractors to complete certain tasks rather than hiring employees. There are advantages to hiring an independent contractor. First, instead of paying significant overhead costs for an employee – including taxes, benefits and insurance – you pay a contractor only for the end result. Second, hiring a contractor involves a smaller administrative workload. An owner need only file IRS Form MISC-1099 as opposed to dealing with the numerous forms and deductions required for a regular employee. It is important not to treat your contractor like an employee. The penalties for incorrectly labeling a worker as a contractor can be costly. An owner is responsible for the employer taxes for failure to withhold as well as a portion of the employee’s taxes that were not paid. You must file MISC-1099 for each contractor that you paid in excess of $600.00 during the year. Failure to file could double your percentage of the employee taxes you may owe should you determine that your contractor was actually an employee.
If the answer is "Yes" to the following questions the worker is probably an employee:
1. Does the owner provide instructions to the worker about when, where and how he or she is to perform the work?
2. Does the owner provide training to the worker?
3. Are the services provided by the worker integrated into the owner’s business operations?
4. Must the services be rendered personally by the worker?
5. Does the owner hire, supervise and pay assistants to the worker?
6. Is there a continuing relationship between the owner and the worker?
7. Does the owner set the work hours and schedule?
8. Does the worker devote substantially full time to the business of the owner?
9. Is the work performed on the owner’s premises?
10. Is the worker required to perform the services in an order or sequence set by the owner?
11. Is the worker required to submit oral or written reports to the owner?
12. Is the worker paid by the hour, week or month?
13. Does the owner have the right to discharge the worker at will?
14. Can the worker terminate his or her relationship any time he or she wishes without incurring liability to the owner?
15. Does the owner pay the business or traveling expenses of the worker?
Have you considered a human resource audit to help you avoid incorrectly treating a worker as an independent contractor?