What You Need to Know About Hiring Independent Contractors

Posted: May 08, 2012

[caption id="attachment_10037" align="alignright" width="400"]© alexskopje - Fotolia.com[/caption]Many businesses are hiring help as Independent Contractors, rather than employees. However, if certain IRS conditions prove the person should be classified as an employee, rather than a contractor, and the violation is found, you could be facing big trouble. LegalZoom provides some great tips and resources to help you make the right classification and save yourself potential problems.

The IRS and U.S. Department of Labor have teamed up with a growing number of states to share information and resources that might help uncover worker misclassification violations. In addition to possibly owing back pay (if minimum wage requirements haven’t been met), employers in violation might be on the hook for overtime, back taxes—including the employees’ portion—penalties and interest, fines, retroactive employee benefits, staff time and effort, and possible legal fees. Less quantifiable costs include negative publicity and lowered staff morale. Plus, the fines and penalties imposed increase the more willful the violation.

The IRS is clear that there is no magic formula to determine whether or not a worker is classified as an independent contractor or an employee—it depends on the specific facts of the case. In general, employers can start by considering whether they have the right to control not just the work outcome but how the worker performs the work. Whether or not you actually exercise this right is irrelevant to the worker’s status. There are times, for instance, with highly experienced employees, when organizations provide little guidance or oversight. The question is whether you have the right to.

How does the IRS decide upon the degree of control an employer has over how the work gets done? The IRS’ Common Law Rules cover factors in three main categories: Behavioral Control, Financial Control and Type of Relationship. No one factor is decisive—the totality of each situation must be evaluated.

Read the entire article What You Need to Know About Hiring Independent Contractors.