Businesses today often hire independent contractors over employees, however, the distinction is often blurred and liability may result not only to a third party but also to the Internal Revenue Service. In the event the Internal Revenue Service determines a worker is an employee and not an independent contractor, an employer may be charged with back payroll taxes, interest and penalties.
Once your company determines it will hire independent contractors, certain steps should be taken. It should be clear on the job application that the position is for an independent contractor. Next, all contracts should be in writing between the employer and the independent contractor. The contract should specify that the relationship between the parties is that of an independent contractor. Next, the relationship between the company and the independent contractor should be at arms length. The worker should be paid by the job rather than hourly or weekly.
One of the main factors a court and/or the Internal Revenue Service uses to determine whether a worker is an independent contractor or an employee is the issue of control. A company should make sure the independent contractor has the ability to determine how and when the work is to be performed. The contractor should provide his or her own equipment and tools and be allowed to hire his or her own help.
When it becomes time for payment of the contractor, an invoice should be sent prior to paying for a specific job. Payments to a contractor should be kept separate from payments to employees. Payroll taxes should be the responsibility of the contractor and not the employer. An employer should not include a contractor under any company benefit plans, including Workers Compensation or Health Insurance.
Note: The LAW LETTER is published by J. Neil Lanzi, P.A. for clients, friends and professional associates. The information contained in this newsletter is intended to be general in nature. Actual resolution of legal issues depends on many factors, including the facts of each case and federal, state or local law. Competent professional advice should be obtained before any action is taken based on the information contained in the LAW LETTER.