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Help Center - Independent Contractor
Question:
If we were to go the route of hiring an Independent Contractor for a project what would be are requirements as far as payment goes? Specifically are we required to withhold taxes for them or can we just pay them the agreed rate and leave it to them to report their income for tax purposes? Do we then need to submit any specific IRS form to the contractor or IRS indicating how much we paid them for a given year?
Response:
As an initial and general matter, employers do not have discretion to classify workers as employees or independent contractors as they choose -- typically workers fall into either one category or the other. And, an employer can classify a worker as an independent contractor (where taxes are not withheld and a 1099 is issued at year end for the worker to do so) only if the worker in question truly meets the criteria for independent contractor status. If not (i.e., if what the worker is really doing does not meet independent contractor criteria and instead qualifies for employee status), then the employer must hire and classify him or her as an employee, and pay him or her properly and timely as an employee, with all proper withholdings. The employee vs. independent contractor distinction is not based on job title or how the employer may internally choose or decide to classify a worker.
Independent contractor determinations are made on a case by case basis. The general principle is that the more control an employer has over a worker, the greater the likelihood that the worker will not meet the criteria for independent contractor status. The determination of whether a worker falls in to one category or another is made by assessing a number of factors, the most important of which is the degree of control exercised by the company. Ultimately, it depends on all of the facts and circumstances of the relationship and the engagement, which must be assessed on a case by case basis. You should review the excellent guidance published by the IRS at http://www.irs.gov/businesses/small/article/0,,id=99921,00.html and http://www.irs.gov/businesses/small/article/0,,id=179115,00.html that shed further light on the issue to assist with your determination.
Because independent contractors are not employees, they are not "hired" as employees and are instead "retained" as workers providing a service. They should not have employee personnel files, and typically are not eligible for employer-provided health plans or otherwise entitled to employee benefits. To this end, independent contractors generally should invoice the company for services rendered which the employer should pay through accounts payable -- they are not paid a "wage" through regular payroll processes. (Employers are also not obligated to ensure completion of a Form I-9 for independent contractors, nor do employers need to cover independent contractors under a workers' compensation policy.) To our knowledge there are no specific forms an employer needs to keep on file for independent contractors with the exception, perhaps, of requisite tax documents (we recommend you consult with a tax professional for guidance on any such forms independent contractors should complete. Though guidance from the IRS is available at http://www.irs.gov/businesses/small/article/0,,id=179114,00.html , there may be state tax implications as well). There should, however, be an independent contractor agreement entered into between the company and any independent contractor that provides services to it, and a copy of this contract should be on file for each one. Local counsel can and should assist in drafting independent contractor agreements that meet the needs and objectives of your organization while remaining compliant and enforceable in your jurisdiction. We encourage you to consult a tax professional for further guidance relative to IRS reporting obligations as this aspect of your inquiry is governed by tax laws, not employment laws.
Follow Up Question:
Thank you and I think we safely meet the criteria, however is the independent contractor required to have a business license before we can obtain their services as an official independent contractor?
Follow Up Response:
While having a business license does not alone render a worker as an independent contractor when they perform services for your organization, it may certainly mitigate in favor of independent contractor status. However, whether an independent contractor is required to have a business license and other business and tax-related inquiries are not governed by employment laws and consulting with a tax professional for further assistance is suggested.
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