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Hiring independent contractors, as opposed to full-time employees, can benefit your small business. You can be more flexible as you expand, bring in specialists for specific projects, and wave goodbye without any harsh feelings or unemployment benefits to worry about.
But contractors can complicate things, legally speaking, and treating contractors like employees can get you into some tax trouble down the line. So, when are independent contractors not really contractors, and what are the costs of misclassifying employees as contractors?
The Internal Revenue Service looks at 20 factors when distinguishing between an employee and an independent contractor. Among the factors that indicate an employer-employee relationship are:
Factors that delineate independent contractors include:
While it's true that your small business may save some money by hiring independent contractors (by not paying into unemployment insurance, healthcare benefits, or payroll taxes), misclassifying employees as contractors could cost you in the long run.
The IRS has been consistently cracking down on independent contractor use, and the Department of Labor began a Misclassification Initiative in 2011. The DOL can secure unpaid wages for misclassified employees, and the Internal Revenue Code includes some hefty penalties for failing to deduct and withhold taxes of misclassified employees, including double penalties for employers who disregard reporting requirements.
The IRS has also been known to win punitive damages (monetary awards above and beyond compensation that are intended to punish the guilty party) in misclassification cases in the past.
This means that your penny pinching now may mean paying the piper later. So, before you get into trouble with independent contractors, contact an experienced labor law attorney for help.