With Tax Day just around the corner, it’s appropriate to look at who is treated as an employee and who can qualify as an independent contractor. As an employer, it may be advantageous to treat people as independent contractors and have them take care of their federal tax burden. This saves you time, money, accounting, and reporting. However, it might be quite short-sighted.
Calling someone an independent contractor for expediency who doesn’t otherwise qualify as one can make you liable for penalties and back taxes. So, take a closer look at what really constitutes an independent contractor before deciding just to tell someone that they are responsible for their own taxes when, in fact, that might not be true.
The IRS is quite clear on what they consider an employee and what qualifies as an independent contractor. If there is any doubt, consult IRS Publication 15-A. This can be found online and has been published for the past several years – updated annually. The 2016 edition is now available.
There are several criteria that need to be followed to make sure someone is an independent contractor rather than an employee, including having their own tools, having more than one client, and paying their own fees and taxes. As we look for strategic partners to use in our aging-in-place solutions business, it’s important to understand these criteria.
The most crucial aspects of what determines whether someone is an independent contractor – or an employee – have to do with how the work is completed.
To be a true independent contractor, the person in question must function as an independent business with their own business name or business identity. They must not be relying on the workspace that they want you to provide, share, or furnish for them to use as their place of business. They must have a normal place of business, even if it is an office in their home.
An independent contractor must be able to complete the assigned or agreed to work on their own schedule. We cannot require them to be present on a jobsite during any certain hours although we may schedule a meeting with them to evaluate the job before beginning it or for a progress report. We just can’t prescribe certain hours that they need to be present.
As long as the contracted project is completed by the agreed upon or specified time, they are in compliance. It doesn’t matter how many or how few hours they actually put in to accomplish the job we have hired them to do, or if they start at midnight and work all night on it.
The other determining factor – and perhaps the most important – is that they need to use their own skills and methods. We cannot dictate the forms they need to use, the processes we want followed, scripts to use in contacting or calling people, or a set of procedures to be used in their work. We will have hired an independent contractor because of their expertise. Then we need to rely on it for them to complete their work.
Independent contractors in the form of strategic partners will be a significant part of how we conduct and operate our aging in place services business, let’s make sure we use people who actually fit the right criteria.