If your business uses independent contractors, the best tax advice is simple: Watch your back! Why? Because state governments are lining up to help the IRS nab businesses they believe have misclassified workers as independent contractors instead of employees.
In tax terms, the difference is huge. If the IRS says you did it wrong, the taxes and penalties will do some serious damage. And states now want their pound of flesh as well. Pennsylvania, for example, just enacted a law that can impose civil and even criminal penalties on businesses that misclassify workers. Other states with similar laws include Connecticut and Massachusetts. Others won’t be far behind.
And be aware that the IRS uses leads and other information it gets from all states to identify and audit small businesses it feels are misclassifying workers. In short, small business is a big target, and thousands of audits are underway already, with thousands more to come.
Using independent contractors or “contract workers” properly has long been one of the stickiest issues that small-business owners face. Are the people you bring in to provide specific services “independent contractors” (nonemployees)? Or are they actually employees?
Here are some things you should do and know:
• Using an independent contractor agreement can help (a little). A simple agreement that specifies the independent contractor relationship can help validate your position, but it’s not enough by itself. Sample agreements are available online at Business Owner’s Toolkit (www.toolkit.com) and DocStock.com.
• Know the rules for your specific business or industry. Some industries or types of businesses have established a tradition of using independent contractors and have cleared this with taxing authorities. But at the same time, firms in certain industries are at high risk for “reclassification” audits – especially construction and landscaping. IRS Publication 15-A: The Employer’s Supplemental Tax Guide (available at www.irs.gov) has detailed guidance for specific industries.
• Know what the IRS says. Look at what the IRS is saying about the business relationship between you and the person performing services. The Small Business and Self-Employed Tax Center (www.irs.gov/businesses) has a section called “Independent contractor or Employee” with info you need.
• Contractors control when and where they work. While they might receive job specifications from a client, they are not given specific instruction on how to accomplish a task.
• Avoid trouble. Avoid setting a pattern of daily or weekly work hours dictated by your business. •
Dan Kehrer can be reached at editor@bizbest.com.
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