Remember I am NOT an IRS enrolled agent or a tax lawyer or anything similar.
The IRS is very picky about who is and who is not an Independent Contractor (hereinafter IC), you need to be just as picky because if the IRS says someone you paid as an IC is not one, they levy back taxes and penalties. And it doesn’t stop there cause then the state gets into it and wants their share too (employment taxes, payroll taxes, unemployment taxes, etc).
Free for the download are the following IRS pubs – get them.
Pub 15 – (Circular E) Employer’s Tax Guide
Pub 15A – Employers Supplemental Tax Guide
Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Form SS-8 can be filled out and sent to the IRS and they will send back a determination.
Pub 15 says “Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.”
Pub 15A says “The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result. [emphasis added]
Notice the word, “right”, not whether you do in fact exert that control but have the right to is what counts.
“An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.” [emphasis added]
So one key seems to be that you:
Cannot control how the work is done
Cannot control the specifications for the work
From what I can find, the IRS agents who audit follow this set of questions when making a determination in the field. (These considerations have been published in Rev. Rul.. 87-41, 1987-1 C.B. 296)
[emphasis added to phrases I think are the key] All definitions are from IRS Pub 15A unless otherwise noted.
* Instructions. – The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
* Training. – An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
* Integration – When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business. (Rev. Rul.. 87-41)
* Assistants – if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status. (Rev. Rul.. 87-41)
* Location, hours and duration of work. – An employee is generally subject to the business’ instructions about when, where, and how to work. (Pub 15A) … Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required. (Rev. Rul.. 87-41)
* Reports – A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control. (Rev. Rul.. 87-41)
* Significant 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 necessary for independent contractor status.
* Un-reimbursed expenses. - Independent contractors are more likely to have un-reimbursed expenses than are employees
* Services available to the public. – An independent contractor is generally free to seek out business opportunities.
* Method of payment. – An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
* Opportunity for profit or loss. - An independent contractor can make a profit or loss.
* Employee benefits. – Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
* Intent of parties/written contracts. – Written contracts describing the relationship the parties intended to create.
* Permanency. – 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. [I read 'generally considered' as not mandatory]
* Discharge/termination. – An independent contractor cannot be fired so long as the independent contractor produces a result that meets the contract specifications. (Rev. Rul. 75-41, 1975-1 C.B. 323.) … If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer- employee relationship. (Rev. Rul. 70-309)
* Regular business activity. - 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.
So as I see it, to sum up:
You must have a contract.
You cannot dictate the work place, hours, equipment needed, or supply the equipment
You cannot dictate how the work is performed
You cannot stop the IC from hiring their own help
You cannot reimburse expenses incurred by the IC
You cannot pay benefits
You cannot require progress reports
The work to be performed cannot be a usual aspect of your business
The IC must be able to offer the same services to the public
The one hang up I see is the termination clause. How can an independent contractor be held liable for something if they decide to terminate the relationship? If the contract is for a specific job performance I can see it, but if you are hiring, as an example, someone to proof read and edit, or translate – then what?
EDIT: I figured it out. The independent contractor can be held liable for exposing company procedures, policies, trade secrets, development and thing of that nature. So specify this aspect in the contract.
Here is a sample of what I think is a good IC contract. If there are lawyers reading this blog, I would appreciate them looking this over and voicing an opinion. The only thing missing IMO is a work for hire paragraph in the event you are having someone do something that normally would result in a copyright or patent situation. But that can be added pretty easily.
http://www.medlawplus.com/legalforms/instruct/sample-independentcontractor.pdf
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