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Text File | 1992-04-30 | 13KB | 268 lines

@165 CHAP 9

              ┌─────────────────────────────────────────┐
              │  INDEPENDENT CONTRACTORS OR EMPLOYEES?  │
              └─────────────────────────────────────────┘

As pointed out elsewhere in this program, there are some major tax
and other advantages in hiring independent contractors rather than
employees to work in your business.  Not only do you effect consider-
able payroll tax savings (no FICA, FUTA or state unemployment tax),
but there are fewer administrative headaches, since you don't have
to withhold income and payroll taxes from payments to an independent
contractor (generally), you don't have to provide workers' compensation
coverage for them, and you don't have to cover them in your retirement
plan or other employee fringe benefit plans.

Too good to be true?  Yes, if the people in question don't qualify to
be treated as other than employees.  Unfortunately, just because you
agree with someone you hire that they will be an independent contractor
does NOT make it so for tax and legal purposes.  Thus, before you at-
tempt to hire anyone to work for you as an independent contractor, you
need to take a hard look at whether the IRS or a court of law would
consider that person to be your employee, rather than an independent
contractor.  The IRS uses the following 20 factors to test and evaluate
whether or not a person is an employee:

    . CONTROL.  If a worker is required to comply with directions
      about when, where and how the job is to be done, he or she is
      usually an employee.  (This is the key factor to consider.)

    . TRAINING.  Where the owner trains a worker, it indicates that
      control is being exercised over the means by which results are
      to be accomplished.  Ergo, the worker is an employee.

    . WHO MUST RENDER SERVICES?  If the services must be rendered
      personally, it suggests that the employer controls both the
      means and the results of the work.

    . INTEGRATION.  When the continued operation of a business depends
      on the rendition of certain services by the worker, those ser-
      vices are necessarily subject to a certain amount of control
      by the business.

    . HIRING, SUPERVISING & PAYING ASSISTANTS.  Control is exercised
      if the company hires, supervises and pays assistants of the
      worker in question.

    . CONTINUING RELATIONSHIP.  A continuing relationship between the
      worker and company is indicative that an employer-employee
      relationship has been created.

    . HOURS OF WORK.  If set hours of work are established, it suggests
      control, and therefore is indicative that an employer-employee
      relationship exists.

    . FULL TIME REQUIREMENT.  If the worker is required to devote full
      time to the one "client," it strongly indicates that the "client"
      is exercising control over the worker's time, and is thus his or
      her employer.

    . WORKING ON EMPLOYER'S PREMISES.  Control is indicated if the work
      is performed on the company's premises.

    . ORDER OR SEQUENCE OF WORK IS SET.  If the worker is not free to
      choose his or her own pattern of work, but must perform services
      in the order or sequence set by the company, it is indicative of
      control by the company.

    . ORAL OR WRITTEN REPORTS.  A requirement that the worker must
      submit regular oral or written reports to the company suggests
      control by the company.

    . PAYMENT BY THE HOUR, WEEK, OR MONTH.  Payment by the hour, week
      or month usually (but not always) is indicative of an employer-
      employee relationship.

    . PAYMENT OF BUSINESS/TRAVELING EXPENSES.  Payment of the worker's
      business and/or traveling expenses gives the appearance that the
      worker is an employee.

    . FURNISHING OF TOOLS & MATERIALS.  If the company furnishes sig-
      nificant tools, materials and other equipment, it points to an
      employer-employee relationship.

    . SIGNIFICANT INVESTMENT.  If the worker invests significantly in
      facilities that are not typically  maintained by employees (such
      as an office rented at fair market value from an unrelated party)
      he or she will usually be considered to qualify as an independent
      contractor.

    . RISK OF PROFIT OR LOSS.  If a worker can make either a profit or
      a loss (in addition to the profit or loss ordinarily realized by
      employees), it indicates independent contractor status; if he or
      she cannot, then the worker is an employee.

    . WORKING FOR MORE THAN ONE FIRM.  If a worker performs significant
      services for a number of unrelated persons at the same time, he
      or she is an independent contractor, not an employee.

    . MAKING SERVICES AVAILABLE TO THE GENERAL PUBLIC.  A worker is
      considered to be an independent contractor if making his or her
      services available to the general public on a regular and con-
      sistent basis.  (Just printing up some business cards won't do
      the trick, however, and won't fool most Revenue Agents.)

    . RIGHT TO DISCHARGE.  The right of a company to discharge a worker
      indicates the worker is an employee.

    . RIGHT TO TERMINATE.  A worker is an employee if he or she has the
      right to end the relationship with the company at any time he or
      she wishes without incurring any liability.

Other factors that the courts may look at in deciding this issue in-
clude a determination of whether the kind of work the person does for
you is of a kind normally done by employees (such as secretarial work,
for example), and whether the worker is a licensed professional of any
type (such as a lawyer, architect, etc.).

Unless you are quite clear that the work relationship will not be con-
sidered that of employer-employee, be VERY careful about hiring someone
as a so-called independent contractor.  The consequences of being wrong
can be severe.  Some of the things (all bad) that can happen if your
"independent contractor" is held to be an employee are as follows:

    . You are liable for not only the employer payroll taxes you failed
      to pay, but also a portion of the employee taxes you failed to
      withhold (income taxes, FICA).  If you treat someone as an in-
      dependent contractor, you should report payments of $600 or more
      to that person on IRS Form 1099-MISC.  If you do, and the IRS
      later determines that the person was really an employee, the back
      taxes you are liable for are limited to:  (a) the employer pay-
      roll taxes, (b) 20% of the employee's FICA tax you failed to
      withhold, and (c) income tax withholding equal to only 1.5% of
      the wages you paid the person.  But if you do NOT file a Form
      1099-MISC and the person is re-classified as an employee by the
      IRS, you are liable for 40% of the employee's FICA tax and income
      tax withholding equal to 3% of the wages (twice as much as where
      you have filed the 1099-MISC).  Furthermore, there is now a $100
      penalty for failure to file the 1099-MISC and you will owe inter-
      est on the taxes due.  You may also be assessed other penalties
      if you did not have a reasonable basis for treating the person
      as a non-employee and may be liable for up to 100% of the FICA
      and income tax which you failed to withhold.

    . If the person is hurt on the job and you have not provided wor-
      kers' compensation coverage, you could be liable for extensive
      legal damages.

    . If your firm has a qualified retirement plan and you have not
      contributed to the plan on behalf of the person because he or
      she was not thought to be an employee at the time, the re-
      tirement plan could be disqualified for tax purposes for fail-
      ing to cover the employee in question.

Be aware that if you do take the precaution of filing the 1099-MISC
form, you will be inviting an IRS investigation, if not a full-blown
audit.  The IRS has recently instituted a major "search and destroy
mission" for following up on 1099-MISC filings to determine if the so-
called "independent contractors" shown on such forms should in fact
be considered employees.

       ┌───────────────────────────────────────────────────────┐
       │BOTTOM LINE:  Don't let yourself be stampeded into the │
       │independent  contractor game  by friends and  business │
       │associates who tell you how  simple and easy  it is to │
       │avoid paying all those payroll taxes---unless  you are │
       │planning to become a part of the subterranean economy. │
       └───────────────────────────────────────────────────────┘


   WAYS TO AVOID HAVING INDEPENDENT CONTRACTORS TREATED AS EMPLOYEES
   ─────────────────────────────────────────────────────────────────

There are a number of steps you may be able to take to make a stronger
case for someone who does work for you being treated as an independent
contractor.  Obviously, not all of the following will necessarily be
feasible in every case, and a number of these steps, if implemented,
may require some significant changes in the way you do business.  But
if you can follow most of the suggestions below with regard to a given
worker, you should at least improve your odds against having that
worker reclassified as an employee.


   . Have a written agreement, signed by both parties,
     that makes it clear that the company doesn't have
     the right to control the methods or procedures for
     the worker to accomplish the work contracted for.
     Include language in the agreement that it is the
     worker's obligation to pay income and self-employment
     taxes on amounts earned, and that he or she will
     receive a 1099 reflecting amounts earned, if $600
     or more.

   . Try to avoid setting working hours by day or week.
     It would be acceptable to specify starting and
     completion dates for the work.

   . Make it clear that if additional workers are needed
     to help, the contractor will hire and pay them.

   . If tools are needed, the contractor should provide
     and select them for the job.

   . The arrangement should make it clear that the
     contractor is not limited to working exclusively
     for you, but is free to take on other work from
     other customers.

   . Compensation should be based on what work is
     performed rather than the time spent to do it.
     This may require careful estimates so that the
     worker is fairly paid, and not overpaid for the
     work done.

   . Avoid providing office space to the contractor on
     a regular basis.

   . Let the workers be responsible for their own
     training, if that is possible.

   . Each worker should be advised, in writing, to
     provide for their own liability, workers' compensation,
     health and disability insurance coverage.

   . Costs such as meals, transportation, and clothing
     should be built into the contract price of the job,
     rather than being billed directly to your account.

   . It should be clear in your agreement with the worker
     that he or she can't be fired, and can't quit.  Their
     job is to fulfill a given work contract.

   . Don't give the worker other work to "fill in" during
     downtime.  This may mean, of course, that you will
     have to pay the workers somewhat more for the work
     done than you otherwise would, if you wish to keep
     them happy.

   . Don't EVER pay bonuses to a person you treat as an
     independent contractor.


@CODE: CA
@CODE:NF
Note that in California, the rules are even tougher.  Under California
law, any construction worker who does not hold a valid California con-
tractor's license is treated as an employee of the general contractor.
The state has started cross-checking, by computer, all 1099 forms filed
by licensed contractors, and if the subcontractor on a 1099 is not a
licensed contractor, the EDD will treat the general contractor as an
employer and hold it liable for payroll and withholding taxes with
regard to the unlicensed payee.

NOTE ALSO:  California's Franchise Tax Board has now begun (1991)
requiring withholding on payments made to nonresident independent
contractors for services performed in California, IN ALL INDUSTRIES.
Withholding is required with regard to any nonresident payee for
whom a Form FTB 1099 information return is given, and the tax is to
be remitted on Forms FTB 591 and 592.

           ┌───────────────────────────────────────────────┐
           │"Hire an independent contractor, go to prison."│
           │ -- Motto of the California Franchise Tax Board│
           └───────────────────────────────────────────────┘

@CODE:EN