If you are like most employers, the chances are you use Independent Contractors. Employers engage the services of Independent Contractors (IC’s) instead of employees for numerous reasons. Mostly, to save money on a range of employment costs, such as:

• federal and state tax,
• workers compensation insurance,
• unemployment insurance,
• employee benefits,
• overtime, vacation and sick pay.

However, now more than ever, employers must be aware that federal and state lawmakers are beginning to crack down on employers who hire ICs that do not meet the strict IRS requirements.

What are the guidelines to be an Independent Contractor?

The following are excerpts from the IRS website, Section 762 – Independent Contractor vs. Employee:

• Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means.
• Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

1. The extent to which the worker has unreimbursed business expenses
2. The extent of the worker’s investment in the facilities used in performing services
3. The extent to which the worker makes his or her services available to the relevant market
4. How the business pays the worker, and
5. The extent to which the worker can realize a profit or incur a loss

• Type of Relationship covers facts that show how the parties perceive their relationship. This includes:
• Written contracts describing the relationship the parties intended to create
• The extent to which the worker is available to perform services for other, similar businesses
• Whether the business provides the worker with employee–type benefits, such as insurance, a pension plan, vacation pay, or sick pay
• The permanency of the relationship, and
• The extent to which services performed by the worker are a key aspect of the regular business of the company

Government crack-down

As the government is looking for ways to bring in revenue in a down-economy, they are paying serious attention to the losses incurred by the usage of ICs. Reports estimate the misuse of ICs lowers income tax revenues by about $4.7 billion annually. In Illinois, for example, the  University of Missouri–Kansas City Department of Economics estimates that from 2001 through 2005, the state lost $124.7 million PER YEAR year in income taxes as a result of IC misclassification by employers.

In August, Congress began reviewing several bills that tighten restrictions on the use of ICs and exact tougher penalties on employers who bend the rules. The IRS also announced plans to randomly audit six thousand businesses nationwide to curb abuse.

Don’t take shortcuts

If your company engages the use of ICs, don’t let the lure of bypassing a few tax and insurance dollars distract you from the real-life risks at hand. You should take the time to seriously review your IC relationships and determine if they do, in fact, match the IRS guidelines. If you are uncertain where to begin, there are professional human resource outsourcing and consulting firms that specialize in these employment relationships and can guide you to make the right decision for your company.