Are there some benefits of hiring an independent contractor?
Contractors are relatively cheaper than hiring permanent employees. Apart from paying salaries and other compensations, employers parts with other expenses such as payroll taxes, insurance premium among other benefits. When hiring ICs, you don’t need all these expenses. Hiring an independent contractor also minimizes exposure to a law suit.
What are some of the risk of hiring an independent contractor?
Although independent contractors offer a lot of benefits, misclassifying workers as ICs can be economically devastating. Businesses are expected to pay the IRS owed taxes with interest with a penalty of about 20%. States audit is more common, and most occur when workers classified as ICs apply for unemployment compensation after their services are terminated.
How can a business determine whether a worker is an employee or independent contractor?
There is no clear way of classifying independent contractors and the actual employees. Some of the legal test used by government employees includes the Internal Revenue Services, State Tax Departments, State Unemployment Compensation Insurance Agencies, State Worker’s Compensation Insurance Agencies, and National Labor Relation Board. Each of these institutions has different rules of classifying independent contractors and employees, and each of the agencies makes its own decision without considering what the other agencies have done.
Is it important to ask consultants and freelancers to sign written independent contractor agreements?
Yes, it is critical. Asking them to sign a written agreement helps avoid future disputes. The written agreement indicates the services that the IC is expected to perform, when he/she should perform and how much the IC should be paid. Written agreements also help to establish that a worker is an independent contractor.
Is there a specific procedure I should follow to ensure that the worker I employ is really an independent contractor?
The best way to ensure that the worker you are hiring is an independent contractor is to ask the contractor to fill out a questionnaire designed to elicit information that shows that the IC is actually running an independent business. It is also important to ask the independent contractor to provide you with documents that help to prove that the IC is actually self-employed.
Are there some specific steps I should take to avoid classification problems with government agencies?
Yes. You should treat an IC like an independent business entity. For instance, you should not supervise, trained or want to require an independent contractor to attend specific hours or companies’ functions. If an independent contractor has completed a specific job, which he was hired for, avoid giving him another work before writing a new agreement. Also, don’t give IC other benefits or business cards.