One of the more complicated tasks for a business owner is being able to correctly classify the people working for you. As a one man shop
it it’s fairly easy, when you pull someone in it is a temporary arrangement. As a larger operation, it gets a bit tougher. The Department of Labor and the IRS have just made this issue more complicated. The Department of Labor and the IRS have partnered along with some state governments to crack down on the misclassification of employees. Here are a few guidelines to keep you on the right side of the Department of Labor.
Independent Contractors
The key to this term is how much autonomy this contractor has. In the eyes of the IRS, an independent contractor is someone who owns and
operates their own business. For the IRS to deem the person an independent contractor you tell them the scope of work and what the end product needs to be and the contractor decides how to complete it. The IRS uses a 20 Factor Analysis to determine Independent Contractor status, if you answer that you are responsible for at least ten of these areas you need to consider reevaluating their status.
1. Do you tell them when, where and how to work?
2. Do you provide them with training?
3. Do their systems integrate with yours?
4. Can the contractor send a substitute to complete the
task?
5. Can they hire their own assistants?
6. How often do they work for you? Is it contract specific
or recurring?
7. Do you set work hours?
8. Do you require FT work from contractors?
9. Can they only do work for you on your premises?
10. Do you set the delivery order for work?
11. Do you pay by the hour or by project completed?
12. Who pays travel expenses?
13. Who buys tools and materials?
14. Do they make a profit or a loss in the arrangement?
15. Are they able to work for more than one customer at a
time?
16. Are their services available to the general public?
17. Do they have any financial investment in the location or
equipment used to perform services?
18. Can you fire them at any time?
19. Can they quit at any time?
If you are responsible for more at least ten of these area,get thee to your tax accountant or request an IRS determination ruling using a form SS-8. This is a very important determination; a wrong determination can cost you grief in the form of an unpaid payroll tax bill. An IRS determination is highly subjective so itcan seem like a bit of a wind test, but sit down with a tax expert to make sure nothing is omitted or misleading. Good Luck!
I have an interesting question, are you setting boundaries for your contract workers? What type of culture are your creating in your business and is it the culture that you want for your company?
You make a great point Reggie! The culture of your company determines so much in terms of contract workers. Many companies see contract workers as vendors and don’t think they have to be involved, but as you said it is the reputation of your business at stake. The only thing I would suggest is to be careful how you manage the contractors because the IRS determination is very unclear. It is basically up to the individual to determine in their opinion if it’s a contractor or staff. Great input, thanks Reggie!