Independent Contractor or Employee: Beware-Murky Water Ahead

Are there rules for hiring Independent Contractors?

This is one of those HR answers which begin with the words, “it depends”.  Unless you are brand new to Human Resources, you have realized by now that few questions can be answered easily without considering more of the situation at hand.

Most independent contractors are self-supporting business individuals who are hired to perform specific tasks.  They are in business for themselves and are not the hiring firm’s employee.  Because they work for themselves, they are not eligible for unemployment, disability, or workers’ compensation benefits.  The hiring firm does not have to pay employee-employer taxes, provide workers’ compensation insurance, and usually is not liable for the contractor’s action except in certain cases such as sexual harassment.

So what are the rules for Independent Contractors?  It is suggested that you get a signed W-9 IRS form for all independent contractors when they begin work.  At the end of the year, employers must send a 1099-MISC IRS form to all contractors that they paid $600 or more to for the year (2010).

Additionally, the IRS determines whether a person is an independent contractor or not based on 20 Factors for Independent Contractors.  If you treat a professional as a contractor and the IRS rules later they should have been an employee, you may be liable for back payment of employer payroll taxes to the IRS.

What else is needed?  In order to clearly distinguish the responsibilities of an independent contractor, employers should have a Contractor’s Guidebook, related forms and policies to reduce financial exposure and protect the business.

The best advice I can give, if you treat contractors too much like an employee—so may the IRS.  It’s better to make a clear distinction between the treatment of employees and contractors, when it comes to factors such as pay, work hours, and job requirements, in order to protect their status as an independent contractor in the eyes of the IRS.