Blog

January 6, 2010

Use Independent Contractors Carefully

This article is provided by the Greater Scranton Area SCORE Chapter.

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.  Call (570) 851.1608 or visit www.scorescranton.org to contact the Greater Scranton Area SCORE Chapter.