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What you should know about using contract employees

As a business owner, it can seem like a good idea to hire independent contractors as staff in your business. You do not have pay taxes or withhold Social Security for these people, but you can get in hot water with the IRS if you are misclassifying employees as contractors. Although there is not a checklist that you can tick off to determine which classification to use, there are questions you can ask to make sure you are classifying your workers appropriately.

  • How much control does your company have over the worker and the job? Under this category, consider how detailed the instructions are that you give the worker. Do you tell this person what tools to use? Or do you give individualized instructions to the worker as to the sequence or order in which the work must be completed? The more details your business outlines, the closer you get to having an employee, rather than an independent contractor.
  • What type of financial control do you have over the worker? Independent contractors are generally paid a flat fee for the job, while employees are given hourly or weekly wages. How are expenses reimbursed? A contractor does not get expenses reimbursed, while an employee does.
  • What is the type of relationship you have with the worker? This goes beyond a simple contract stating that the worker is a contractor or employee. The IRS looks at things such as insurance, vacation and sick days. The permanency of the relationship would be examined. What services does the worker provide for the business? Does the business present the worker's work product as its own?

A business has to examine each question and look at the entire relationship between the worker and your business. It is not an exact science, unfortunately. If your business misclassifies workers, even unintentionally, you could be liable for back taxes and fines.

If it is unclear which classification to use

Sometimes, it is difficult to know how the IRS would classify a worker. When you and the worker cannot come to an agreement over the classification, you or the worker could file Form SS-8 with the IRS and let them review the facts of your situation. However, this determination takes time, often up to six months.

As a business, if you are hiring contract workers, it would be beneficial for you to speak to an experienced business attorney who can make sure your contract is legal under the applicable laws. You can discuss your obligations towards your contractors and make sure you are handing your tax obligations appropriately.

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