IRS Is Coming After Your Independent Contractors

Posted on August 17,2014


IRS coming after your Independent Contractors and here is what you need to do.  One place the federal government ca find more cash without raising taxes is payment of existing ones.   To protect your company against substantially expanded IRS investigation of unpaid employment taxes here’s good advice from Robert Woods, a tax lawyer experienced in employment-tax issues.  [Tax Note Today]


To back up classifying a worker as an Independent Contractors instead of an employee, have a written agreement that includes the following key terms:


Names-and titles: The agreement should clearly state that the worker is an IC and not an employee and avoid any terms indicating an employment relationship.


Training and employer instructions: ICs largely obtain their own training and determine when, where and how work is done.  The contract can specify expected work standards, but there should be no ongoing instructions  from the employer.


Delegation: An IC permitted to delegate some or all work to his/her own workers and to train them and who is responsible for their results is more likely to hold up as an IC.


Work periods:  It is preferable that an IC contract be for 1 year or less, with renewals.  The longer the term, the more likely the worker will be deemed an employee.


Caution: A contract that states employer-set work hours indicates employment.


Exclusivity:  People who work exclusively and full-time for one firm are likely to be deemed employees, regardless of the other facets of the relationship.  ICs make themselves available to the public for work.  The IRS looks for non-compete clauses in IC contracts.  By definition, independent contractors should be allowed to offer their services to other customers.


Location: Unless the IC is serving employer machines or equipment, designating work locations, especially on employer premises, indicates employment.  ICs choose and pay for their own work locations.


Periodic reports: Requiring progress reports indicates control and an employment relationship.  With an IC, you should be concerned only with the final product.


Compensation:  Time-based compensation, hourly or other, generally indicates employment, but not always.  When possible, base compensation on output.


Expenses: ICs generally pay their own overhead and expenses (except perhaps travel expenses)-I.e., they should pay for their equipment and supplies.  Make this clear in the contract.  If needed, increase the contract price instead of paying an IC’s expenses.


Risk:  It should be possible for an IC to lose money -at least theoretically.


Termination:  Either party should be able to terminate the contract with 30-days’ notice for any reason.



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Drafting a Independent Contractor Agreement.


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