Yesterday we talked about the new bad news about Social Security funding. There’s one thing you can count of these days – more taxes.
In this case, it means more aggressive collection of Social Security and Medicare taxes. One of the things that the IRS is going to be targeting will be Independent Contractor status.
If you hire an employee, you have to pay payroll taxes. Your employee also has payroll taxes withheld from his check. That means the government is collecting Social Security and Medicare tax. It also means that the Social Security and Medicare tax is calculated based on the gross income.
As an employee (and an employer), it’s Earn * Tax * Spend.
On the other hand, an Independent Contractor is a business owner. She is responsible for calculating and paying her own taxes. The Social Security and Medicare tax is calculated on the NET income of her business, not the GROSS amount of her paycheck.
As an independent contractor, it’s Earn * Spend * Tax.
And as a business owner who contracts with an independent contractor, you’re not responsible for any of the Social Security and Medicare tax.
It’s no wonder that most business owners want to have independent contractors instead of employees.
And it’s no wonder that the IRS wants your independent contractors to actually be employees.
In order to prove that you have an Independent Contractor status for someone working for you, there are a couple of different ways that the IRS might look at it.
- The three common law rules:
- Behavioral: Does the company control or have the right to control what the worker does?
Financial: Are the business aspects of the worker’s job controlled by the payer?
Type of Relationship: Are there written contracts or employee type benefits?
- The infamous 20 questions:
- There are 20 questions that help determine whether you have an independent contractor relationship or an employee relationship with the people that work for you. The questions have to do with which whether they are paid on a regular basis, by the hour, regardless of results and whether the worker is responsible for his own training and equipment. All of these things indicate whether the worker is more like an employee or an independent contractor.
And above all else, make sure you have an Independent Contractor Agreement for each service provider! It’s not enough to just have an agreement, but without one you’re going to have a very hard time proving the relationship.
We’re featuring the Independent Contractor Agreement package this week. You’ll find the questions an IRS agent is likely to ask you if you are selected for audit and you’re going to create an effective strategy to win the argument. Plus, you’ll get the template you need to create a good agreement for your Independent Contractors.
It’s such a small thing – an agreement – but without one, you could end up paying thousands and thousands of dollars in tax.