Sidestep The Risk Of Independent Contractors Who Aren't
By: Marc J. Lane
Whatever the parties believe or contract, the IRS has the final word about whether or not a worker is really an employee
Considering he's the richest man in the country, not all has been going Bill Gates' way. The Justice Department is after him on Antitrust grounds; he recently took a pie in the face; and his senior managers at Microsoft Corp. learned that workers can be company employees even after they sign agreements that they're independent contractors.
Whatever the parties believe or contract, the IRS has the final word about whether or not a worker is really an employee - and whether his or her boss can be saddled with all kinds of penalties for violating federal law. What's more, the employer might well face a slew of new and unexpected costs - FICA, unemployment insurance, workers' compensation, overtime pay and employee benefit plan contributions among them. The IRS decides who is an employee and who isn't by reference to a 20-factor test, but it all really boils down to control. If the company has the right not only to decide what job is to be done, but exactly how it is to be done, the worker is probably an employee and enjoys all the rights of employment.
Here are a few pointers to keep in mind as you try to stay on the safe side of any controversy: Insist that your independent contractor invoice you for services rendered. Billing is a clear indicator of self-employment.
Stay away from words connoting employment. Your contractor should be "retained," not hired; and he or she should be paid a "fee," not a "salary" or "wage".
Make sure your contract denies the worker any and all benefits, including health insurance.
And, finally, shift some entrepreneurial risk to the worker, who should pay all job-related expenses. As any self-employed person would, he or she should then build those costs into the fee your company is charged. Follow the rules and, in at least this one small way, you'll have a better year than Bill Gates is having.
About the Author
Marc Lane is a business and tax attorney, a Master Registered Financial Planner, a Registered Financial Consultant, and a Certified Investment Specialist. Marc is the author of 30 books on business organization, taxation, and personal finance. His newest book, "Advising Entrepreneurs: Dynamic Strategies for Financial Growth" draws from his experience working with those who have successfully built their businesses. Marc is an Adjunct Professor of Law at Northwestern University and an Adjunct Professor of Business at the University of Illinois. His practice areas include Individual Taxation, Corporate Tax Planning, Business Tax Planning, Estate Planning, Investments, Retirement Planning,Elder Law, International Trade, Business Law, and Wills, Trusts and Estates. Additional articles, case studies, and a free email newsletter are available at www.marcjlane.com.
This article was posted on February 10, 2003
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