Using Independent Contractors | How-to Guides for running your business from Business.com

Using independent contractors or "contract workers" properly is one of the stickiest issues facing small business owners today. Are the people you bring in to provide specific services for your business "independent contractors" (non-employees)? Or are they actually employees? A great deal hangs in the balance. And unfortunately, it's not merely up to you to choose. The IRS and equivalent state agencies are strict on worker classification issues. They look askance at this type of relationship because independent contractors are responsible for paying their own taxes and it's tougher for the IRS to make sure they're doing so. Knowing these basics will help:

Working with independent contractors (ICs) can save your business a bundle in payroll taxes, insurance, benefit costs, training and other areas. But misclassifying an employee as a contractor can lead to big penalties.
Independent contractors work for themselves. They operate their own business and have you as a client. You are not their employer and don't set their hours or control how they perform their work.
Government agencies tend to see it this way: A worker is an employee of your business unless you can prove otherwise.
The key issue often comes down to this: How much control does your business wield over the worker?

Business.com's "What Works for Business" blog is a great way to keep up with the latest solutions, trends and strategies for small and medium business — including other tax and legal issues.

Action Steps
The best contacts and resources to help you get it done

Create and use an independent contractor agreement

A simple agreement that specifies the independent contractor relationship can help validate your position, but it won't be enough by itself.

I recommend: Sample agreements are available online at Business Owner's Toolkit and LegalDocs.

Get the inside scoop on your specific business or industry

Some industries or types of businesses have established a tradition of using independent contractors rather than employees and have cleared this with taxing authorities. But at the same time, firms in certain lines of business are at high risk for aggressive state worker "reclassification" audits.

I recommend: The Independent Contractor Report has been tracking legal issues in this area since 1986. See their helpful Checklist for Using Independent Contractors in Your Regular Business Operations. Also check their list of jobs frequently targeted by worker classification auditors.

Find legal advice and audit representation services

Review your treatment of workers as non-employees or independent contractors before an examination letter arrives. The IRS and individual states target small companies daily.

I recommend: WorkerStatus.com has tips and links on how to protect yourself and what to do if you receive an audit notice.

Get everything you need to legally hire independent contractors

Legal self-help publisher Nolo has a great guidebook that shows you how to: create a valid contract, assess who qualifies as an independent contractor, hire ICs without risking an audit, retain ownership of intellectual property when using ICs and take advantage of the IRS "Safe Harbor" law. The book comes with contracts as both tear-outs and on CD-ROM. At about $25 for the eBook download, it's a bargain.

I recommend: Details and ordering information at Nolo.

See what the IRS says

The Small Business & Self Employment section of the IRS Web site offers the federal tax agency's view on who qualifies as an independent contractor and who does not. You'll find helpful case examples and a list of factors that the IRS considers.

I recommend: See Independent Contractors vs. Employees at the IRS site.

Tips & Tactics
Helpful advice for making the most of this Guide

Contractors control when and where they work. While they might receive job specifications from a client, they are not given specific instruction on how to accomplish a task.
Avoid setting a pattern of daily or weekly work hours dictated by your business.
Contractors do not usually have a permanent or continuing relationship with your business and have time to pursue other clients. Compensate contractors on a per-job basis, rather than weekly or monthly.
Contractors are paid to complete a set task and may bring in others to complete it, at their discretion and on their payroll.
Contractors should use their own tools and technology and be responsible for their incremental expenses. They have an investment in their own "business" and should be able to perform their duties without your facilities.
Contractors can't be fired as long as they produce results that meet their contract specifications.
Do not include them under any insurance or benefits coverage you have for employees.

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