Software Club 210: Light Red/Club_Software_210_Light_Red_Micro_Star_1997.iso/sba/f259.sbe

Text File | 1997-01-18 | 21KB | 474 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 considerable 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, you don't have to worry
about the Age Discrimination in Employment Act and the
Americans with Disabilities Act of 1990 (since both Acts
apply only to employees, not independent contractors), 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 attempt 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 services 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 significant tools, materials and other
      equipment, it strongly 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 consistent basis.  (Just
      printing up some business cards won't do the trick,
      however, and will not fool any but the most
      dim-witted 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 include 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 considered that of employer-employee, be VERY careful
about hiring someone as a so-called independent contractor.
The consequences of being wrong can be severe, and few
people ever suspect the enormous risks in using independent
contractors until it is too late.  A state or federal audit
that disallows independent contractor status can mean
personal financial disaster for you as a small business
@IF121xx]owner, even though @NAME is incorporated.
@IF120xx]owner of @NAME, a @ENTITY.
@IF113xx]
@IF113xx](Even though, as an LLC, your company has limited liability.)

The IRS "business plan" has recently focused heavily on the
independent contractor vs. employee issue, and the IRS is
generating large amounts of revenue from this issue on tax
audits.  In recent audits, the average reclassification
assessment was $68,000, according to one report, and some 90%
of the IRS audits found misclassified independent contractors
working for the firms that were audited.

           ┌─────────────────────────────────────────┐
           │ HARD FACTS:  During the period from 1988│
           │ to 1995, the Internal Revenue Service   │
           │ performed 12,983 employment tax audits, │
           │ which resulted in re-classification of  │
           │ some 527,000 workers as employees. Their│
           │ employers were assessed $830 million in │
           │ back taxes, penalties, and interest.    │
           └─────────────────────────────────────────┘

Some of the things (none of them good) that can happen if
your "independent contractor" is held to be an employee
include the following:

    . 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 independent
      contractor, you should report payments of $600 or
      more to that person on IRS Form 1099-MISC.  If you
      do, an