Independent Contractors – Taxes and Management
With the growing gig economy and more companies moving from employee-centric workforces to more independent contractors, beginning the process requires two main areas of consideration. Both involve management of the contractors, one for taxation reasons and the other for productivity and work quality.
Finding and Managing Independent Contractors
There are online resources for matching independent contractors with businesses or projects. Most will have the business set up a profile and the contractors do so as well. Then the business will publish a project or job specification with requests for bids. There can be fees to be site members for both, and there will be a percentage or other fee levied on job proposals that result in the match with a contractor and completion of projects. Some considerations of note include:
- These sites will have some type of rule about the relationship that is designed to keep the two entities, business and contractor, working through the freelance site forever or for a minimum period of time. This is to keep them from setting up a direct relationship off the site.
- The site will handle payments, collecting from the business and paying the contractor after the site’s fee is taken.
- Mediation or arbitration is handled by the site when there are disputes. The key to minimizing the chance of dispute is a detailed project/job description such that the contractor understands what the client wants.
LinkedIn.com is one resource that allows business and contractor to connect independently and could be useful in finding qualified personnel. The best way to manage expectations and productive relationships is a well-crafted Independent Contractor Agreement. When requirements, delivery instructions, and quality are clearly set out upfront, the relationship benefits.
Independent Contractor Management with IRS Approval
While there are many advantages to using independent contractors in place of employees, it is not just a matter of the owner saying that they are not employed. There are strict rules and tests the IRS uses to determine the status of a worker. Failing to pass the tests can have your independent contractor’s status changed to that of an employee with steep penalties and interest.
The business owner must change the ways in which they relate to the worker, and there is some loss of control of process and scheduling. The IRS does not want to see the employer giving too much specific instruction as to how and when work is to be accomplished, though delivery deadlines are OK. The IRS uses three broad areas of examination of the relationship:
- The Relationship – There should be written agreements that clearly indicate that the hire is to be project-based, and there should not be an indication of any permanent relationship. The independent contractor should be treated as an independent businessperson with no offer of typical employee benefits.
- Financial Control – The employer should not have any significant financial investment in the facilities or resources used by the contractor in their business. The relationship should clearly set out payment for delivery of services without investment of the employer in how delivery is accomplished.
- Behavioral Control – How or when the contractor accomplishes the tasks for which they were hired should not be dictated by the employer. While delivery deadlines are acceptable, any other instructions as to when or how the contractor completes tasks is not allowed.
Many business owners have found that their business can be more efficient with lower administrative and overhead costs using independent contractors. Just find good ones, manage the services delivery, and stay on the good side of the IRS.