In December 2007, the IRS forced Federal Express to pay at least $319 million in back taxes because it “employed” independent contractors instead of W-2 employees to drive its trucks. In December 2000, Microsoft settled a lawsuit with former independent contractors who claimed that they missed out on company-sponsored benefits. Microsoft paid $97 million plus back taxes.
So... how many independent contractors are working at your company? If the answer is 1 or more, you may want to re-examine the status of your independent contractors.
While hiring independent contractors is a good short-term solution, it's not as simple as signing an independent contractor agreement. What it boils down to is whether the “contractor” is really an employee by law. While there is a series of questions to help determine the employee status, the primary factor is the extent to which you control how the person performs his or her duties. For example, if you hire an outside person to overhaul your computer system, he or she provides you with a date by which the work will be done, and you then let this person go about his or her work, the person is likely an independent contractor. Alternatively, if you hire the person, tell them when and where they need to work , how they need to report into you then they are probably an employee.
A second factor is how critical the position is to your business. For example, you can outsource accounting functions, but you would not likely outsource an executive position. There are many more factors that help government agencies determine the tax status of an individual when it is brought into question.
So why care? There are possible fines and back taxes that can be levied against an employer for failure to properly withhold, pay (employer portion), or remit employment taxes. The best thing you can do is start with a good position description. At EMPO, we work with our clients to develop the position description and determine employee or contractor status; we recommend that you too work with an HR professional to help make the determination. However, there are some resources you can use if you choose to ‘go it alone’. The easiest is the IRS; they have developed a process that allows them to determine status. It can be found at http://www.irs.gov/pub/irs-pdf/fss8.pdf. The downside to using the IRS is that it could expose you to back payment of employment taxes. Another option is to use IRS material available at http://www.irs.gov/pub/irs-pdf/p15a.pdf.
So... how many independent contractors are working at your company? If the answer is 1 or more, you may want to re-examine the status of your independent contractors.
While hiring independent contractors is a good short-term solution, it's not as simple as signing an independent contractor agreement. What it boils down to is whether the “contractor” is really an employee by law. While there is a series of questions to help determine the employee status, the primary factor is the extent to which you control how the person performs his or her duties. For example, if you hire an outside person to overhaul your computer system, he or she provides you with a date by which the work will be done, and you then let this person go about his or her work, the person is likely an independent contractor. Alternatively, if you hire the person, tell them when and where they need to work , how they need to report into you then they are probably an employee.
A second factor is how critical the position is to your business. For example, you can outsource accounting functions, but you would not likely outsource an executive position. There are many more factors that help government agencies determine the tax status of an individual when it is brought into question.
So why care? There are possible fines and back taxes that can be levied against an employer for failure to properly withhold, pay (employer portion), or remit employment taxes. The best thing you can do is start with a good position description. At EMPO, we work with our clients to develop the position description and determine employee or contractor status; we recommend that you too work with an HR professional to help make the determination. However, there are some resources you can use if you choose to ‘go it alone’. The easiest is the IRS; they have developed a process that allows them to determine status. It can be found at http://www.irs.gov/pub/irs-pdf/fss8.pdf. The downside to using the IRS is that it could expose you to back payment of employment taxes. Another option is to use IRS material available at http://www.irs.gov/pub/irs-pdf/p15a.pdf.
By Scott Andreassen, Senior HR Consultant
Founded in 1999, EMPO Corporation is a leading Human Resource Outsourcing (HRO) and Professional Employer Organization (PEO). EMPO services all markets with specialties in the manufacturing, professional services and nonprofit sectors. For more information on EMPO Corporation and other human resource related topics, visit www.empocorp.com.
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