1. Do I have a contract with this person/business?
Most independent contractors will require you to sign a contract before using their services. If you do not have a contract, you should probably have them draw one up. This covers many topics, but especially the terms of employment. It defines a working relationship for a limited period of time, the terms under which that relationship may be dissolved early, and the terms for completing the contracted work. You are not be able to fire an independent contractor the way you would an employee, so it’s important to have that settled to avoid wrongful termination or contract violation suits. Also, having a contract enables you a level of protection if the IRS questions the status of the individual as an independent contractor.
2. Do they set their own hours?
Independent contractors create their own hours based on the work needed. You may agree on a time to meet, a time when their work would be preferred (such as loud construction work) or a deadline that the work will be completed within, but they are not required to follow a set weekly schedule that you create for them. An independent contractor will make their own schedule based on the task that they are assigned. Regular hours for long periods of time are also red flags and indicators that the person you have working for you may be better classified as an employee.
3. Do they work for your staff, or does your staff work for them?
Independent contractors will hire their own staff if assistance is needed. You are not required to provide staff for the contractor to complete the job.
4. Do you receive invoices for work completed?
Generally, a great way to ensure that you’re working with an independent contractor is for them to supply and invoice for certain milestones or work completed. This illustrates that you have a record of being billed, and the contractor has a record of billing you. Lack of invoicing or recorded services rendered for payment is a red flag when filing taxes.
5. Are you or a manager training or dictating the work done?
Independent contractors are hired with a description of the work needed, and are only responsible for the result of the work. If you are training someone, or having them answer to an authority within your company, there is a good chance that this person qualifies as an employee, not an independent contractor. This is why it’s important to know the difference between an independent contractor and an employee. With an independent contractor, you want to be sure that they have the skills and knowledge to complete the job before you hire them, so that you are not overseeing their style of work. Hiring an employee, while having less outside expenses, is a great way to ensure that you are able to monitor their training and progress in a long-term capacity.
6. How much are you paying them?
Independent contractors are generally responsible for many of the expenses that an employer would otherwise incur. Due to this fact, they usually charge more than an individual employee. This is not without exception, and won’t raise as many red flags as the other factors, but if you are paying someone a regular hourly wage at a lower rate for an extended period of time, making them an employee will protect you in many ways and help keep things organized for when it’s time to file.
Knowing the facts about independent contractor/business owner relationships is sometimes ignored and extremely vital to proper tax filing. Claiming a legal independent contractor relationship while practicing an employer/employee relationship can result in serious consequences for the business. For example, the IRS could require you to pay the individual any difference in wages they would have earned if they had been hired as an employee. You will also be responsible for back taxes concerning Social Security, Medicare, and Unemployment. More serious financial consequences include paying for injured employees after their injury, and providing benefits equivalent to those of your other employees.