IRS Charging Large Fines Reclassifying Independent Contractors as Employees within Small Businesses

According to individuals at a recent White House Conference on Small Business, the most important concern concerning small businesses in America is disputes about independent contractor classification. With all that's taking place in the U.S. economy nowadays, you may think that arguing about independent contractor status would be the last thing on the government's to do list. But with approximately eight million independent contractors, 85% of whom do not shell out enough taxes reported by IRS claims, reclassifying them as employees would definitely fatten up Uncle Sam's piggy bank.

Who is more likely to suffer the effects of independent contractor reclassifications? The answer is you, the independent home business entrepreneur. If the IRS demands your independent contractor is an employee, they might come after you for back Social Security, Medicare, and Unemployment taxes. In addition, should they believe you purposefully misclassified the contractor you may be defending yourself against criminal prosecution. Doing battle with the IRS will sink many independent small business owners.

So how do you avoid disputes concerning independent contractor status? Regrettably, there isn't any definate formula which will determine whether someone is an independent contractor or employee. The IRS looks at the relationship amongst the business owner and contractor and looks at the amount of financial and behavioral control the owner has. Next the IRS will make a judgment call. Even a signed contract describing an independent contractor arrangement is worthless if the IRS determines the vendor satisfies the part of an employee. Take advantage of the seven tips listed below to guarantee your home business can easily overcome any claims that your independent contractor is an employee.

1.Never have an independent contractor fill out an application. Instead have the contractor submit an offer or written estimate for a project. You can, of course, require references and require verification of applicable licenses or insurance. However, asking a contractor to complete this data on a form, regardless how harmless it might appear, may lead the IRS to believe the contractor was "applying" to get a job.
2.Always get a authorized project estimate. The obligations of the independent contractor should be associated with particular tasks. For example, an employee would "assist with accounting as required" whereas an independent contractor would "file the quarterly taxes" or "prepare a profit and loss report."
3. Pay for each project, not an hourly charge. Obviously there are several exceptions for this guideline. Professionals like lawyers or accountants will often bill you based on how long it took them to accomplish a task for you. It is normally accepted that attorneys, accounting firms, and other professional companies with their own companies are independent contractors. The hourly fee could get dicey though when you're working with Joe the plumber. Joe may possibly attempt to influence you to compensate him hourly. Don't do it! Joe's income must be based solely on the project at hand.
4. Do not tell your contractor exactly how or when to do their job. Even though it is great business practice to inform your contractor in detail the specifics of the task you need accomplished, the type of components you need, the quality of work you expect, as well as the deadline for project completion, you can't tell him how to deliver the results or which hours he must work on it. That level of control will probably cause the IRS to conclude an employer / employee association exists.
5. Don't provide equipment or supplies. In the event you don't like lending your things to other people, you have a bon a fide reason to just say no! The IRS expects independent contractors to have their own supplies and equipment to do the task. Loaning equipment or reimbursing contractors for supplies suggests that he is being treated as a possible employee.
6.Indicate a period when the business relationship will end. Most of the time this will be upon completing the task. Nevertheless imagine for a moment you have an office cleaning business. Perhaps your small business is responsible for cleaning twenty office buildings each week. In this scenario, it's likely that you would outsource the cleaning tasks to independent contractors. Exactly how do you deal with an ongoing assignment without appearing like an employer? Specify a time frame during which the contract is valid. For instance, your independent contractor will clean office complexes X, Y, and Z every week for a duration of one year. At the end of the year the current contract would be renewed or could automatically expire.
7.Do not monopolize your contractor's time. Many contractors are delighted if you can provide enough business to fill their calendars. On the other hand, monopolizing your contractor's schedule is risky. In cases where the contractor is so busy doing projects for you that he doesn't have free time for other clients, he looks increasingly more like an employee. An even better solution is to split the work among many contractors and be sure each contractor has clients in addition to you.
In his testimony before Congress, the Acting Commissioner of Internal Revenue said, "One of the most complicated and controversial issues within the employment tax area is definition of ‘employee'." In spite of his admission that the guidelines are extremely confusing, the burden remains within the small business owner to prove using a preponderance of evidence that a supplier is undoubtedly an independent contractor as opposed to an employee. Following the guidelines above should help in making a powerful case for independent contractor distinction. To learn more about the distinctions between an employee and independent contractor visit the IRS website.

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