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Independent Contractors Offer Advantages — and One Major Risk

Independent Contractors Offer Advantages — and One Major Risk

Posted on June 22nd, 2023

Hiring someone as an independent contractor can have many advantages for employers.

Among them are that independent contractors:

  • Can be hired on a per-project basis and let go when the project is complete,
  • Are often experienced in their respective fields and want to maintain a degree of independence
  • Don’t require the supervision that’s necessary with employees, and
  • Don’t have to receive benefits or workers’ compensation.

Perhaps the biggest risk of engaging an independent contractor is that the IRS will eventually determine that the person is actually an employee. In such an event, you could be held liable for back taxes, penalties and fines. It pays to know the difference

Generally, the degree of control you exercise over a worker determines whether the person is an independent contractor or an employee. For example:

  • Employers typically provide a workers’ materials and tools, while independent contractors usually provide their own.
  • Employers set an employee’s work hours while independent contractors usually get to set their own schedules.
  • The more “integrated” or central a job is to a company’s operations, the more likely the worker is to be considered an employee.

The chart below can help you determine whether a worker is an employee or an independent contractor. Unfortunately, no single factor determines a worker’s status. The IRS and other government agencies, as well as courts that hear related cases, examine a variety of factors.

To protect your organization, you can request documents from independent contractors that will help you prove their status should the IRS or another government agency come calling. These include copies of advertising or directory listings, business name statements, an Employer Identification Number (if the independent contractor has employees), and business or professional licenses.

EmployeeIndependent Contractor
Worker must obey instructions concerning when or how to perform the job.Worker is responsible for the outcome of the job and can determine how it’s to be done.
Company provides training.Worker may be licensed by a state board and may have invested considerable sums in training.
Services must be performed by the worker. The company hires, supervises or pays a worker’s assistants.Worker can hire assistants and is responsible for their pay.
The worker has an ongoing relationship with the company.Worker advertises or otherwise makes services available to the general public.
The company sets work hours.The worker can set work hours.
The company requires full-time work at its business.Worker can work for more than one company at a time.
The company controls where the work is performed and the order in which tasks are done.The worker can complete tasks at the office or at home. The worker decides how to finish the job.
The worker receives payment by hour, week or month.Independent contractors are usually paid on a per job or commission basis.
The company provides tools and materials.The worker has personal tools, equipment, materials and/or facilities and, often, has invested significantly in them.
The worker generally doesn’t take on any financial risk and the company pays travel and business expenses.The worker can realize a profit or loss from a job and generally pays any expenses incurred.
The worker can usually quit without liability for failure to complete a job.The worker is liable for completing a job according to contract.

If you’re still unsure whether a worker qualifies as an independent contractor, Beers, Hamerman, Cohen & Burger, P.C. can help you make this determination per the latest IRS guidance.