With today’s technology, it’s harder than ever to tell which businesses use virtual workers and which have employees in their offices. That’s great news for your small business, because even if hiring full-time employees isn’t part of your current plans or current budget, you can use independent contractors to help you solve immediate staffing issues.Even better news: You have plenty of fish in the freelancing sea to choose from. The Bureau of Labor Statistics and the Government Accountability Office estimate there are more than 20 million freelancers seeking work.
Now, the bad news: One of the biggest mistakes employers make is misclassifying a worker as an independent contractor to avoid paying taxes. If the Internal Revenue Service determines that the worker is actually an employee, you could get into big (and costly) trouble. Here’s how to play it safe when dealing with independent contractors.
Ask an expert.
If there’s any doubt on whether or not you should classify a worker as an independent contractor, talk to your accountant or file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding with the IRS. The IRS can assess your specific situation and make the official decision on your worker’s status. You do not need to pay employment taxes for independent contractors, but if they earn more than $600 from your company, you will need to issue a1099 to the IRS, and the contractor will need to fill out a W-9 form.
Do your own test.
“Independent” is the key word in making this determination. The IRS bases its ruling on three criteria:
How much instruction do you give the worker on a daily basis? Who controls the “method” used to complete the job? Did you instruct the worker on his or her hours or the tools they should use to complete the work? Where is the work actually done? In your office space or at the worker’s home or office?
Do you reimburse the worker for expenses, or is the person responsible for paying their own expenses and writing them off as a tax deduction? What equipment has been purchased for the work and who paid for it? How is the worker paid (by salary or per project)? Does the worker also do similar work for other clients?
Is the worker/employer relationship specified in a contract with a beginning and ending date? Were any benefits discussed, such as health insurance?
Get it in writing.
The best way to make sure you are hiring an independent contractor is to agree to the temporary nature of the relationship with a contract. Be specific as to when the relationship will end and under what circumstances the relationship can be terminated.