Classifying Contract Workers

Posted: May 7, 2009 1:41 PM
Updated: May 7, 2009 1:41 PM

Real Small Business: Management

From the Editors of Real Small Business

One of biggest impediments to small business growth is the difficulty of classifying workers as independent contractors instead of employees. This is essentially a tax issue. An independent contractor -- someone who does work for your company but is not a full employee -- is responsible for paying his/her own taxes. If that person were classified as an employee, you would be responsible for taxes. But the IRS has a long list of qualifications a worker must meet to be classified as an independent contractor, and often business owners and the IRS disagree about who qualifies. The IRS qualifications are listed here, along with some steps you can take to increase the likelihood of your workers qualifying as independent contractors.
The issue of control is central to the IRS' independent contractor evaluation. If you control how a worker completes a task for you, the IRS often regards your relationship with a worker as employer-employee. In order for someone to qualify as an independent contractor, the following conditions must exist: The worker hires, supervises and pays his or her assistants
The worker is free to work when and for whom he or she chooses
The worker does the work at his or her own office or shop
The worker is paid by the job or receives a straight commission
The worker has the risk of profit or loss
The worker does work for several businesses at one time
The worker makes his or her services available to the general public (sometimes indicated by having business cards or a listing in the Yellow Pages)
The worker cannot be fired as long as he or she meets contract specifications

Some states have rules regarding independent contractors so check with your state's employment office before hiring. In addition, certain workers are automatically classified as employees, regardless of their work arrangement with you. Workers in this category include: full-time salespeople who sell goods for resale; full-time life insurance agents working mainly for one company; at-home workers who are supplied with material and given work performance specifications; and food and laundry delivery drivers.

To increase your chances of convincing the IRS that a worker is in fact an independent contractor, take the following steps:

State in your contracts that a worker is an independent contractor including a statement that all payments to the worker will be reported to the IRS on Form 1099.
Pay for work by the job, instead of by the hour, the week or the month.
Have all workers submit invoices for work before paying them.
State in all contracts with contract workers that the individual is responsible for his or her own insurance, including workers' compensation.
Construct a contract that allows the contract worker to use his or her own tools and equipment, and to hire his or her own assistants.