| So, your business is growing and you are ready to | | | | when hiring subcontractors. |
| outsource or delegate some of the work in your | | | | Also, training in company policies is not necessarily the |
| business. However, you are confused about how to | | | | same as training in how to do the actual services. |
| classify a new team member: employee or | | | | 2. Financial Control |
| independent contractor? The following is an overview | | | | Financial control considerations are as follows: |
| of classification of workers to help guide this important | | | | - The extent to which the worker has unreimbursed |
| business decision. As with any aspect of your | | | | expenses. |
| business that is of a legal or tax nature, you should | | | | - The extent of the worker's investment in the facilities |
| consider seeking the formal advice of an accountant | | | | used in performing services. |
| and/or attorney to assist you. | | | | - The extent to which the worker makes his or her |
| Hopefully, this overview will provide you with enough | | | | services available to the relevant market. |
| basic information to ask relevant questions of your | | | | - How the business pays the worker. |
| business advisors. | | | | - The extent to which the worker can realize a profit |
| Classification of Workers | | | | or incur a loss. |
| - Classification of a person as an independent | | | | 3. Type of Relationship |
| contractor or employee is important for tax purposes. | | | | The IRS examines the relationship between the |
| - For an independent contractor, you must file IRS | | | | parties: |
| Form 1099-MISC to report payments of $600 or more. | | | | - Written contracts describing the relationship the |
| - If you classify an employee as an independent | | | | parties intend to create. |
| contractor and you have no reasonable basis for | | | | - The extent to which the worker is available to |
| doing so, you may be held liable for employment taxes | | | | perform services for other, similar businesses. |
| for that worker, which typically include income taxes, | | | | - Whether the business provides the worker with |
| Social Security, Medicare, and unemployment. | | | | employee-type benefits, such as insurance, a pension |
| - If you want the IRS to determine whether a worker | | | | plan, vacation or sick pay. |
| is an independent contractor or an employee, you can | | | | - The permanency of the relationship. |
| file Form SS-8, Determination of Worker Status for | | | | - The extent to which services performed by the |
| Purposes of Federal Employment Taxes and Income | | | | worker are a key aspect of the regular business of |
| Tax Withholding. | | | | the company. |
| Independent Contractor vs. Employee | | | | For more detailed information visit and refer to IRS |
| - As a general rule, an individual is an independent | | | | Publication 15-A, Employer's Supplemental Tax Guide |
| contractor if the person for whom the services are | | | | or IRS Publication 1779, Independent Contractor or |
| performed has the right to control or direct only the | | | | Employee. |
| result of the work, and not what will be done, how it | | | | Terms of an Independent Contractor Agreement |
| will be done, or the method of accomplishing the result. | | | | The following are typical clauses found in an |
| - An individual is an employee if he or she performs | | | | agreement between a retaining business and an |
| services for an employer and the employer can | | | | independent contractor: |
| control what will be done and how it will be done. | | | | - Define independent contractor status |
| Categories of Control | | | | - Scope of work (duties & required responsibilities) |
| The IRS examines the relationship between the | | | | - A non-solicitation and/or non-compete clause |
| business and the worker by reviewing 3 categories: | | | | - Non-disclosure clause |
| Behavioral Control, Financial Control and Type of | | | | - Copyright/work-for-hire |
| Relationship | | | | - Consent to use of trademark |
| - These 3 areas form a list of 20 factors that the IRS | | | | - Payment terms (compensation & out-of-pocket |
| uses to determine the distinction. IRS Revenue Ruling | | | | expenses) |
| 87-41 outlines the 20 factors in detail. | | | | - Term of project or relationship/termination |
| - Generally speaking, independent contractors retain | | | | - Obligation to carry general liability insurance |
| control over their schedule and number of hours | | | | - May also include a governing law provision, |
| worked, jobs accepted, and performance of their job. | | | | indemnification clause, conflict of interest clause, |
| - Employees usually work a schedule required by the | | | | non-hire provision, and request for taxpayer ID number |
| employer and their performance is directly supervised. | | | | for 1099. |
| - IRS Publication 1779, Independent Contractor or | | | | Non-compete agreements are reviewed by the courts |
| Employee, is another valuable resource that discusses | | | | for reasonableness based on several factors, including |
| the differences between the two classifications | | | | the nature of the business, the nature of the worker's |
| 1. Behavioral Control | | | | duties, the geographic territory encompassed by the |
| Behavioral control covers whether the business has a | | | | non-compete, and the length of time chosen. They are |
| right to direct or control how the work is done through | | | | often hard to enforce. |
| instructions, training, or other means. | | | | Non-solicitation agreement can protect against stealing |
| - When and where to do the work. | | | | of clients and/or employees. |
| - What tools or equipment to use. | | | | For an employee, you can draft a basic employment |
| - What workers to hire or to assist with the work. | | | | letter outlining date of hire, salary and benefits package, |
| - Where to purchase supplies and services. | | | | probationary period, pay raise eligibility, etc. Employees |
| - What work must be performed by a specified | | | | are generally "at will" unless otherwise designated, |
| individual. | | | | meaning they can be discharged due to any legitimate, |
| - What order or sequence to follow. | | | | non-discriminatory basis. |
| - Whether worker is trained to perform services in | | | | The employer chooses which benefits to offer (sick |
| particular manner. | | | | leave, vacation, etc.); benefits are usually not required |
| Training is an area where some small businesses | | | | (check state and local laws and regulations). Benefits |
| come close to creating an employment relationship | | | | are mostly based on industry standards and employee |
| with independent contractors by requiring detailed | | | | expectations, and are used to entice employees. |
| training, including "shadowing" of the business owner | | | | As with any major business decision, do your |
| service provider, and requirement that services be | | | | homework -- speak with expert advisors, (accountant, |
| provided in a certain manner. | | | | attorney, business coach, etc.), and speak with |
| Requiring an independent contractor to have taken | | | | colleagues that have experience in retaining workers in |
| certain classes is not the equivalent of providing | | | | order to find out which classification makes the most |
| training, but merely requires a qualification level and skill | | | | sense for your business. |
| set required for work. It may be a safer route to take | | | | |