Tax & Legal
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Use Independent Contractors Carefully

Small business owners often try to save money—especially in the early going—by
using independent contractors instead of hiring full time employees. Using
independent contractors, or “contract workers,” means the business doesn’t have
to withhold taxes, pay Social Security or Medicare or meet numerous other
employer responsibilities.

Many such arrangements, however, wilt under IRS scrutiny. And the strategy can
backfire if someone later claims they should really have been treated, and paid, as
an employee.

Deciding who can legitimately work as an independent contractor and who must
be given employee status has become a difficult matter for small business owners.
You can’t simply choose what’s best for you. The IRS and equivalent state
agencies are strict on worker classification issues.

Remember that independent contractors work for themselves. They operate their
own business. You are their client, not their employer. You don’t dictate their hours
or control how they perform their work. In the eyes of most government agencies, a
worker is an employee unless you can prove otherwise.   

Contractors control when and where they work. Avoid setting a pattern of daily or
weekly work hours dictated by your business. Also, independent contractors do not
usually have a permanent or continuing relationship with the business and have
time to pursue other clients. Plan to compensate contractors on a per-job basis,
not weekly or monthly.

And since contractors are paid to complete a set task, they may bring in others to
help, at their discretion and on their payroll. They also should use their own tools
and technology and be responsible for their incremental expenses.

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. Independent contractors are subject to making a profit—or
suffering a loss—based on their own skills and expertise. Always require an
invoice before making payment.

Before you agree to an independent contractor relationship with anyone, make
sure you understand what that means and carefully weigh the pros and cons. If you
misclassify a worker, you could be liable for back employment taxes plus penalties.

Getting sound advice on management issues such as independent contractor
status is vital for your small business. For help, contact SCORE "Counselors to
America's Small Business." SCORE is a nonprofit organization of more than
10,500 volunteer business counselors who provide free, confidential business
counseling and training workshops to small business owners. Go to www.scoredm.
org on the web or call (515) 284-4760 between the hours of 10:00 A.M. and 3:00 P.
M. Monday through Friday.