If your business uses independent contractors as part of its work force, depending on the circumstances, the IRS might reclassify these workers as employees. Such a reclassification would expose your business to employment taxes and penalties. In addition, your business might be responsible for retroactive fringe benefits for any reclassified workers.
To avoid this possibility, we recommend that employers review every contract the business holds with an independent contractor together with their attorney or CPA. As advisors, we meet with our clients to review their contracts in light of the factors that the IRS considers in classifying workers as independent contractors or employees. Where necessary, we advise clients to reword the contract and meet with their legal counsel to reflect the working relationship.
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While a full discussion of the factors is beyond the scope of this article, a few examples follow:
- Where the worker's services are available to the general public, as well as the business, this usually indicates independent contractor Where the worker provides his services exclusively to the business, this generally indicates employee status.
- Where the business does not have a general "at will" right to discharge the worker (that is, where the business is committed to use the worker for a set period of time or for a certain project), this generally indicates independent contractor status. Where the business can discharge a worker "at will", this generally indicates employee status.
- If a business requires a worker to perform services on the business premises, this generally indicates employee status. Where no such requirement exists, this may or may not indicate independent contractor status.
- Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying an amount that was agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
- If a business provides training to the worker, this generally indicates employee status. Where the business does not provide training to the worker, or hires the worker contemplating that the worker is already trained for the specific task, this generally indicates independent contractor status.
Is it time for you to review your business agreements with independent contractors? If you would like to meet and discuss the employee or independent contractor classification further, please contact us at info@zinnerco.com or 216.831.0733. We’re ready to start the conversation and happy to help.
