HIRING INDEPENDENT CONTRACTORS

If you own a business, you may have more work than an existing staff can handle and yet be reluctant to incur the costs of hiring an additional employee. In that case, you may wish to consider engaging an independent contractor to do the job.

With work performed by an independent contractor rather than an employee, company owners may be relieved of certain liabilities. They avoid Social Security and federal unemployment payroll taxes. Social Security taxes (FICA) could be thousands of dollars for each employee. These rates are scheduled to go even higher in future years. They will also not have to pay state payroll charges such as workers’ compensation, disability and unemployment taxes.

Contractors are not eligible for fringe benefits, so owners save on holiday, vacation and sick pay, medical and life insurance and pension or profit sharing contributions.

The only real governmental obligation concerning independent contractors is to report their fees on Form 1099 if they receive up to a certain amount during the year.

There may not be a net saving of business costs in every case. Compare the fee charged by the independent contractor with the total cost of getting the job done by one or more employees. If the job can be done by an employee who will make the owner eligible for the targeted jobs tax credit, that valuable tax benefit will be lost by engaging an independent contractor.

IRS SCRUTINY

The IRS is also aware of the tax savings available to employers and the potential for income under reporting by independent contractors. To guard against this, it monitors the status of independent contractors to ensure that they are not employees.

Some general guidelines help an owner differentiate. An independent contractor differs from an employee principally in that the contractor is subject to the owner’s control and direction only as to the end result of the job, rather than the means of accomplishing it.

Other factors tend to support (but not necessarily establish) independent contractor status:

1. The worker submits bills for his or her work.
2. He or she is paid by the job instead of by the hour.
3. He or she does similar work for other companies.
4. Type of work is usually done by independent contractors.
5. He or she works at his or her own premises.

A contractor may, however, work at your place of business solely for the sake of convenience.

If the IRS determines that people treated as contractors are employees, an owner may be liable for back employment taxes and penalties. To avoid this possibility, ask the IRS for an advance ruling on the status of any worker that may be in doubt.

Another risk stems directly from the independent contractor. To avoid tax withholding and payroll taxes, he or she may argue for independent status when hired. Then, at a later time, the “independent contractor” may claim that he or she was really an employee and is therefore entitled to unemployment benefits, vacation pay or other employee benefits.

A written contract detailing the respective responsibilities of the parties is an invaluable protection in this regard.

If you will need more help in your business soon, consider carefully the potential for savings in hiring an independent contractor. You might be able to hire a specialist who will get the job done with fewer problems and lower expenses.