There are plenty of reasons to hire an Independent Contractor instead of an employee.
Here are just a few:
- Ability to grow your business quickly,
- Downsize more easily if market conditions require,
- Don’t have to pay benefits,
- Don’t have to pay payroll tax, and
- Many, many more.
In today’s tough economic climate, especially for state and federal governments, it’s the last couple of reasons that have them alarmed. With the growing number of Independent Contractors, as opposed to employees, they are losing out of tax revenue.
The IRS did some test audits on businesses who hired Independent Contractors and found that most did not really have an IC relationship. Instead, the business treated them like employees. And that meant the businesses got hit with taxes and penalties. Based on those sample audits, they now estimate that 85% of small businesses are mis-categorizing their Independent Contractors. In other words, they should be employees. According to the IRS, this is the single biggest concern they have.
And that means a whole lot more Independent Contractor audits.
If you hire Independent Contractors, than you might as well count on them coming after you in an audit.
The IRS used to have a 20 Question Test to determine if you have an employee or an IC. That has been changed now to ‘control questions’. There are primarily three areas of your relationship that the IRS is going to look at:
- Behavioral Control. In a nutshell, does your business control what, when and how the worker does his job? If so, you’re more likely to have an employee/employer relationship.
- Financial Control. Who controls the business aspects of the worker’s job? If you pay for training, tools, and reimburse all expenses, you probably have an employee/employer relationship.
- Type of Relationship. Do you provide benefits? Is the work that the worker does a key aspect of the business? If so, you’re more likely to have an employee/employer relationship.
If you have Independent Contractors, be ready for an audit. That means getting your records and paperwork in order before you get the notice. For more information on how to avoid a future problem, check out Winning the Independent Contractor Agreement updated for 2011 changes.