Is Your Independent Contractor Really an Employee?
If you’ve ever considered hiring an independent contractor, you’d better make sure you understand the classification rules. The IRS has recently begun cracking down on small businesses that misclassify their workers, forcing them to pay back benefits to workers who’ve been improperly claimed as independent contractors.
Some independent contractors have even opted to take the matter into their own hands after losing a big gig. Sheila McClear, a former editor for the Gawker blog, applied for unemployment benefits after losing the 40-plus hour a week “freelance” job. The Department of Labor considered her case, agreed that McClear should have been classified as a full-time employee, and forced Gawker to pay her $405 a week in unemployment benefits.
If you want to avoid ending up in hot water, make sure all of your 1099 workers really are independent. Here are some ways to tell it they really are:
1) They work for other clients. It’s basic, but a big one. If you’re paying a single independent contractor for 35 hours of time or more each week, it’s unlikely he’s doing any significant work for anyone else. Give him a full-time position with benefits, or cut back the hours to avoid scrutiny.
2) They don’t work in your office. Independent contractors may have meetings on-site or be occasionally expected to perform certain tasks at your business, but they shouldn’t be working there all day for months at a time.
3) They have their own equipment. An independent contractor is a business owner; therefore, he should come equipped with all the tools of the trade. Giving a contractor a work laptop or phone may raise eyebrows at the IRS.
4) They have flexibility in when and how their work is performed. Employees are expected to be available for a set of regular hours and may be subject to frequent check-ins. That’s not the case for independent contractors, who generally are free to complete work on flexible schedules, and should be only accountable for meeting pre-arranged deadlines.
5) Their roles aren't essential functions of your company. For instance, if you’re hiring an independent contractor to design your website, you’re A-OK: This is a temporary role that’s not central to your business' line of work. On the other hand, if you’ve hired a 1099 worker to head up your marketing team on a permanent basis, you could be subject to penalties.
Still not sure whether all of your workers are properly classified? Check out the IRS’ guidelines, and consult with a tax attorney or HR consultant to be sure that you’re not running afoul of the law.