Hiring Independent Contractors are a great way to get the additional help you need without having to worry about withholding taxes. Its also a good way to find out if the person you’ve hired to work for you is the right fit. However, the question that arises in the Employer/Independent Contractor scenario is whether the person working for you is truly an Independent Contractor or is he/she really a disguised Employee? There is quite a bit of discussion on this topic and if you googled it i’m sure you would see loads of articles on the issue. The reason its so important is because if the IRS finds out that you have been disguising your employees as Independent Contractors you could be hit hard with penalties, back taxes, and fines.
To help you determine whether the person you have hired is an Independent Contractor consider the following:
- Do they have a flexible work schedule?
- Do you provide a significant amount of direction and/or supervision?
- Is the contractor allowed to work for other companies?
- Does the contract work for you on a daily basis and do you provide daily directions?
- Do you have an Agreement in place? and if so is the Agreement for a set term?
As you can see from this short list of questions the line between an Independent Contractor and an Employee is quite gray. In general, if you feel that you as an Employer exercise significant control (i.e. direction, supervision, etc.) over the worker then you might have an Employee on your hands. If that is the case, then you need to take the steps to voluntarily reclassify the worker into an Employee. Check out the follow up post on Converting an Independent Contractor to an Employee for additional information on the process.