Should you be an Independent Contractor?

After years spent working as an employee, you may have decided to venture out on your own. In this new capacity, you're likely operating as an independent contractor for several firms. This setup generally provides more flexibility than you had before, but also requires a higher degree of legal protection for both your work and your income.

Independent Contractor or Employee?

There are numerous tax and legal battles pending that will further determine the specific criteria for being an independent contractor. Basically the IRS and courts are looking for the independent contractor to own their own equipment, use skills that may not be readily available for a variety of business reasons, conduct independent advertising, pay for their insurance, supply their assistants and choose their own routes and destinations. In essence, the independent contractor should have a risk of losing money.  More than likely, if you fall into this category then you will be considered an independent contractor and exempt from paying payroll taxes (but responsible for self-employment taxes). However, if you answer no to one or more of the situations mentioned above, then you may need to re-evaluate the independent status and your employer would have to pay up on payroll taxes.

Contracts are Your Friend

By using a written agreement, you can head off serious disagreements, define expectations for both sides and clarify the terms of the relationship and financial obligations. And, should the case ever come to court - after all, even written contracts are subject to dispute - you will have the proof in hand needed to support your position. Remember that legal waters can be treacherous if left to navigate them alone. When in doubt, contact an attorney to review your contracts and ensure that your liabilities are covered.   As an added bonus, a written contract can help establish that you are, in fact, an independent contractor rather than an employee. This can protect you from a challenge by the IRS that you are trying to evade payroll taxes.   Independent contractors should, first and foremost, have a legitimate registered business name and an established business type (LLC, partnership, corporation, etc.) with checks being made payable to that business name or corporation. The contractor should be solely responsible for his/her own taxes, both self-employment and income tax as well as workers compensation insurance in the event that s/he is injured on the job.   Lastly, before you hire a freelancer or offer yourself as an independent contractor, sit and carefully review the following areas so both parties are in agreement before work begins.   1.    Review the IRS list of factors used to determine whether a worker is an employee or independent contractor (www.IRA.gov/smallbiz). 2.    Implement a simple agreement specifying the independent contractor relationship. This won't be enough by itself, but it is a great start. Sample agreements are available online at Business Owner's Toolkit (toolkit.cch.com), LawDepot.com and Nolo.com. 3.     If you are the client, ask the independent contractor to complete a questionnaire and prove that they operate their own independent business. Helpful information includes their registered business name, business bank account, Employer Identification Number (EIN) or Social Security number if they are a sole proprietorship, and how the business is structured (LLC, corporation, etc.).  Also verify how the work will be performed, what installments and payments will be due, and if there are any cancellation clauses should one or both parties leave the relationship before the contract is completed.   For more advice on utilizing independent contractors in your business, contact your accountant.   Steven A. Feinberg, CPA - www.AppletreeBusiness.com