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Fearing the IRS
IRS & the Bogeyman
There is much fear and misconception about the IRS qualifications for
an independent contractor (consultant). Many job shop agencies would have
you believe that you cannot hire an independent contractor with impunity.
That IS NOT TRUE! According to the latest information from the Bureau
of Labor Statistics fully 6.7%
of the workforce in this country are independent contractors .The
IRS understands this and has rules to validate a worker's relationship
with a company. The following is the pertinent section from
IRS Publication 15-A 2003, dealing with independent contractors.
IRS Rules Excerpt (Pub 15-A)
- Common-law rules
To determine whether an individual is an employee or an independent
contractor under the common law, the relationship of the worker and
the business must be examined. All evidence of control and independence
must be considered.
- Behavioral control
Facts that show whether the business has a right to direct and control
how the worker does the task for which the worker is hired include the
type and degree of—
- Instructions the business gives the worker.
An employee is generally subject to the business's instructions
about when, where, and how to work. Even if no instructions are
given, sufficient behavioral control may exist if the employer has
the right to control how the work results are achieved.
- Training the business gives the worker
An employee may be trained to perform services in a particular manner.
Independent contractors ordinarily use their own methods.
- Financial control
Facts that show whether the business has a right to control the business
aspects of the worker's job include:
- The extent to which the worker has unreimbursed business
expenses.
Independent contractors are more likely to have unreimbursed expenses
than employees. Fixed ongoing costs that are incurred regardless
of whether work is currently being performed are especially important.
However, employees may also incur unreimbursed expenses in connection
with the services they perform for their business.
- The extent of the worker's investment
An independent contractor often has a significant investment in
the facilities he or she uses in performing services for someone
else. However, a significant investment is not required.
- The extent to which the worker makes services available
to the relevant market.
- How the business pays the worker
An employee is generally paid by the hour, week, or month. An in-dependent
contractor is usually paid by the job. However, it is common in
some professions, such as law, to pay independent contractors hourly.
- The extent to which the worker can realize a profit or
incur a loss.
An independent contractor can make a profit or loss.
- Type of relationship
Facts that show the parties' type of relationship include:
- Written contracts describing the relationship the parties
intended to create.
- Whether the business provides the worker with employee-type
benefits, such as insurance, a pension plan, vacation pay, or sick
pay.
- The permanency of the relationship
If you engage a worker with the expectation that the relationship
will continue indefinitely, rather than for a specific project or
period, this is generally considered evidence that your intent was
to create an employer-employee relationship.
- The extent to which services performed by the worker
are a key aspect of the regular business of the company.
If a worker provides services that are a key aspect of your regular
business activity, it is more likely that you will have the right
to direct and control his or her activities. For example, if a law
firm hires an attorney, it is likely that it will present the attorney's
work as its own and would have the right to control or direct that
work. This would indicate an employer-employee relationship.
Industry Examples (still from Pub 15-A)
The following examples may help you properly classify your workers.
Computer Industry
Example. Steve Smith, a computer programmer, is laid off when Megabyte
Inc. downsizes. Megabyte agrees to pay Steve a flat amount to complete
a one-time project to create a certain product. It is not clear how long
it will take to complete the project, and Steve is not guaranteed any
minimum payment for the hours spent on the program. Megabyte provides
Steve with no instructions beyond the specifications for the product itself.
Steve and Megabyte have a written contract, which provides that Steve
is considered to be an independent contractor, is required to pay Federal
and state taxes, and receives no benefits from Megabyte. Megabyte will
file a Form 1099–MISC. Steve does the work on a new high-end computer
which cost him $7,000. Steve works at home and is not expected or allowed
to attend meetings of the software development group.
Steve is an independent contractor.
Attorney
Example. Donna Yuma is a sole practitioner who rents office space and
pays for the following items: telephone, computer, on-line legal research
linkup, fax machine, and photocopier. Donna buys office supplies and pays
bar dues and membership dues for three other professional organizations.
Donna has a part-time receptionist who also does the bookkeeping. She
pays the receptionist, withholds and pays Federal and state employment
taxes, and files a Form W–2 each year. For the past 2 years, Donna
has had only three clients, corporations with which there have been long-standing
relationships. Donna charges the corporations an hourly rate for her services,
sending monthly bills de-tailing the work performed for the prior month.
The bills include charges for long distance calls, on-line research time,
fax charges, photocopies, mailing costs, and travel, costs for which the
corporations have agreed to reimburse.
Donna is an independent contractor.
Summary
You can see that there is a lot of flexibility and there is room for special
circumstances. If the scope of a project cannot be determined or is changeable,
an hourly billing is acceptable. If, because of hardware facilities or
security reasons, the project must be done on site, it still works.
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