Attorney John Mlnarik
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Is that a Real Employee or a Common-Law Employee?
Before you hire independent contractors, consult with a qualified business attorney to be sure you will comply with IRS regulations. Your attorney can help you draft a written contract that details the duties of the contractor and keeps you on the right side of the law.
The IRS and the Department of Labor are cracking down on businesses that use contractors but treat them like real employees – or, as the IRS calls them, “common-law employees.” Before you misclassify that contractor, ask yourself these 5 questions:
Do you control the work?
If you direct how and where and at what time someone works for you, then the government says you have an employee, not a contractor.
Do you furnish the equipment?
If you have given someone a computer or other equipment on which they will perform work for you, they are likely to be classified as your employee.
Are you in one of these industries?
Some industries are audited at a higher rate than others when it comes to employee misclassification, including nail salons, restaurants, cleaning services, security guard companies, landscaping companies, property management businesses and construction companies. If you are in one of these businesses, you need to educate yourself on employment law with the help of an experienced business attorney.
Is there anything in writing?
Most contractors operate with a contract that spells out the work they will provide and the compensation they will get for it.
Do they just work for you?
Most contractors are free to work for other people, not just you. Even if they don’t actually have other clients, it should be clear that they are free to pursue other work without your permission.
Businesses that misclassify employees as independent contractors are subject to a fine to include a percentage of the income tax that should have been withheld and the business’ share of the FICA and unemployment taxes, as well as interest and penalties. If the IRS deems the misclassification to be “willful,” harsher penalties apply.