Tuesday, September 25, 2007

Employee or Independent Contractor

Many businesses try to avoid having employees. "We'll just call everyone an independent contractor." Unfortunately, this is an approach that can be fraught with risk.

The IRS has a 20 question test they will use to determine if an individual is an independent contractor or an employee. Key questions include:
  • Does the individual set their own hours?
  • Does the individual provide their own equipment or is it provided by the business?
  • Does the individual supervise themselves or are they supervised by the business?
  • Does the individual perform these services for other entities?

Generally speaking, the IRS will decide someone is an employee.

I've dealt with this issue several times over the years, and it just came up again this morning. We have a client that is going to get a large capital investment from an investment fund. The investment fund's attorneys asked this morning if the people performing service for the company are really independent contractors or employees. The issue here was the investment fund wants to make sure they are aware of all liabilities as of the date of investment. If the IRS was to come in and retroactively decide the independent contractors were actually employees, there would be back payroll taxes, workers compensation and sundry other liabilities. Fortunately, our client was in the clear on this.

Post investment, we expect this client to really ramp up operations and hire full time employees. And put them on payroll.

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