You’ll no doubt see a lot of familiarity in your relationship with independent contractors.
They, like you, work for themselves, and usually make arrangements to perform their service on their schedule rather than yours. As such, you are the independent contractor’s client, not their employer, which means you don’t generally withhold taxes from their payments, or pay their Social Security or Medicare.
In addition, independent contractors use their own resources to do the job, whether it’s tools, technology, or people. The independent contractor is also responsible for incremental expenses required, including transportation charges, routine purchases, and time and materials above and beyond his/her estimate.
Still, the difference between an independent contractor and employee can easily be blurred to the point where he or she may well be considered your employee under federal and state law. That makes you an employer, responsible for those payment withholdings, as well as penalties and other obligations.
So before you agree to an independent contractor relationship with anyone, make sure you understand what that means and carefully weigh the pros and cons. If you misclassify a worker, you could be liable for back employment taxes plus penalties.
These steps can help prevent an independent contractor from being misclassified as an employee:
- Specify the task and contractor’s responsibilities/expectations in the contract.
- Avoid setting a pattern of daily or weekly work hours dictated by your business.
- Plan to compensate contractors on a per-job basis, not weekly or monthly.
- Do not include independent contractors under any insurance or benefits coverage you have for employees.
- Always require an invoice before making payment.
If you’re still uncertain as to whether your worker is a contractor or employee, IRS Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” can be filed with the IRS by either you or the worker. IRS will review the facts and circumstances and determine the worker’s status.
Getting sound advice on management issues such as independent contractor status is vital for your small business. For help, contact Raleigh SCORE. We provide free, confidential business mentoring and training workshops to small business owners. To schedule a free appointment with our experienced counselors, go to http://raleigh.score.org, or call us at 919-856-4739.