Small Business and Independent Contractors
Small Business and Independent Contractors
An area of concern to small business owners is the independent contractor's classification. Incorrect classification of individuals has tax and fiscal consequences. The IRS assumes that an individual rendering services to your organization is an employee, unless you prove otherwise.
A contractor is an individual, or a firm, hired to perform a specific job, or project, for another firm for a fixed period of time.
Why small businesses use independent contractors?
1. There is less personnel administration.
2. The business is not responsible for payroll taxes. Please remember that you must request an IRS form W9 from each contractor that works for you and receives payment in excess of $600.00 in a given year.
3. The contractor has a specialized skill, or the capacity, to perform a specific task that your organization lacks.
You are protected with a written, fixed-term, contract that allows you to have control over performance.
Although it is an attractive option, and perhaps economical, to hire an individual under these conditions, you need to ensure that the contractual relationship with an independent contractor is set up properly. The IRS has a 20-question test, while the Wisconsin Department of Revenue has a 9 point test, to ensure proper classification of independent contractors.
At minimum you:
* Must not provide tools, or equipment, to perform the work or task assigned.
* You do not tell the contractor what the working hours are.
* Ensure that the services provided by the individual are not essential for your business operations.
* You have a fixed term written contract.
* The contractor is providing specialized services that you are not able to perform.
* The contractor can gain or lose money in the project.
To avoid confusion with contractors you hire, ensure that you follow solid practices such as:
* Make all contracts in writing.
* Describe in detail the obligations and the scope of work for the contractor.
* Specify commencing, and ending dates, for the work to be performed.
* Indicate under which terms the contractor will be paid.
* Establish cancellation, and non-performance, clauses that protect your business.
To learn more about this topic, request publication 15-A and form SS8 from the IRS (www.irs.gov) or contact your accountant.
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