A contract alone won’t satisfy the IRS if the agency questions the status of an IC. But it can tip the scales in borderline cases. To protect yourself from crippling audits and lawsuits, it’s imperative that you correctly classify workers as independent contractors.
Unfortunately, there is no single, standardized test for determining whether a worker is an employee or an independent contractor. And the IRS isn’t the only agency interested in how workers are classified. These government agencies can also challenge a worker’s status:
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U.S. Department of Labor
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State tax departments
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Workers’ compensation insurance agencies
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State unemployment compensation agencies
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The National Labor Relations Board
The IRS offers a muddled checklist that differentiates independent contractors from employees. The checklist can be found at
www.irs.gov in publication 15A “Employer’s Supplemental Tax Guide.” You don’t have to meet every requirement on the checklist to correctly identify an IC. But, the more items you adhere to on the checklist, the more you’ll satisfy the IRS if the agency comes probing.
To avoid misclassifying independent contractors follow these guidelines:
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Contractors should set their own hours, even if they work in your office
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Pay contractors by the project, rather than by the month, week or hour
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Report contractors’ wages on form 1099, not form W-2
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Contractors should hire their own assistants rather than using your employees
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Insist that the contractor provide you with an invoice for each project
You can protect yourself further by keeping documents that help prove the IC is indeed an independent business. Before you hire an IC, request copies of business licenses, professional certifications and business permits. Also keep an up-to-date contract as well as copies of the contractor’s business card, stationary and marketing materials.
