Many business owners today are looking for ways to decrease the cost of their workforce. The rising cost of payroll taxes, retirement plans and other benefits, along with the advent of Obamacare, have potential employers looking for ways to minimize overhead while still being able to attract and retain talented workers. One increasingly popular option is to hire independent contractors instead of employees. In this type of arrangement, the business is not responsible for any payroll taxes or other benefits, as there is no employment relationship.
While there are some great benefits to this approach, businesses must be careful in establishing these arrangements so that the state or the IRS does not view the independent contractors as employees. The IRS uses a 20-factor test to determine whether a worker is an employee or an independent contractor, but the basic determination boils down to three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
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? Will the relationship continue and is the work performed a key aspect of the business?
Independent Contractor (Self-Employed) or Employee? (IRS Website)
It is important to document the independent contractor relationship in a written agreement with terms that clearly indicate independence and a clear line of separation between the business and the worker. Basically, the business is contracting with an outside party to do the work, so that outside party must, among other things, have the ability to control when and how the work gets done, cover his or her own expenses and pay his or her own taxes.
Not only does this help a business cut costs, but it can be empowering to the worker. It gives the worker some flexibility and freedom as well as increased responsibility, since the independent contractor is basically running his or her own business.
The independent contractor arrangement is not right for every situation, but it can be an effective way to structure a workforce in many cases. If you have questions or need help with creating an independent contractor agreement for your business, please contact Vann & Sheridan, LLP. We would be pleased to assist you.