Preserving Your Status as an Independent Contractor
by
Attorney Stephen Fishman
Follow these strategies to avoid being reclassified as an employee.
The IRS is always seeking to reclassify independent contractors as employees of the businesses it audits. (It gets more money from employees than from contractors, who can deduct business expenses from their income. And it gets its money faster from employees, who have to pay taxes every payday through payroll withholding.)
If you're reclassified as an employee, you'll suffer some consequences. For example, the hiring firm may decide not to use you any more because it doesn't want to pay the additional expenses of treating you as an employee. And reclassification as an employee could create additional tax burdens for you, if you have to forego some of the deductions to which you were entitled as an contractor.
So how do you make sure that the IRS and other government agencies (such as a state taxing authority or unemployment agency) classify you as an independent contractor? If you consistently follow the guidelines below, you'll have a good chance of surviving an audit with your contractor status intact.
Retain Control of Your Work
The most fundamental difference between employees and independent contractors is that employers have the right to tell their employees exactly what to do and how to do it. Don't permit a hiring firm to supervise or control you as if you were one of its employees. It's perfectly okay for the hiring firm to give you detailed guidelines or specifications for the results it expects from you. But how you go about achieving those results should be entirely up to you.
Following these guidelines will help you show that you are the one in charge:
- Don't ask for or receive training from the hiring firm.
- Don't let the hiring firm dictate your working hours, although the firm may give you a deadline for completing your work.
- Decide where you will do the work, unless the work has to be performed on the hiring firm's premises.
- Decide whether to hire assistants to help you; if you hire workers, pay and supervise them yourself.
- Don't ask for instructions from the hiring firm about how to do your job.
Show Opportunities for Profit and Loss
Because they run their own businesses, independent contractors have the opportunity to earn profits or suffer losses. If you run absolutely no risk of loss, you're probably not really an independent contractor. The best way to meet this test is to have recurring business expenses, such as office rent, equipment, and possibly salaries for assistants. This demonstrates that you could face a loss if you don't find enough work.
You can also show an opportunity for profit or loss by charging your clients a set price for a specific project, rather than billing by the hour or day. If the project price exceeds your expenses, you'll make money; if you charge too little, you'll come out in the red.
Look Like an Independent Business
Take steps to show you are an independent businessperson. Here are a few things you can do:
- Use a fictitious business name instead of your own name.
- Maintain a separate bank account for your business.
- Obtain all necessary licenses and permits for your profession.
- Carry business insurance.
- Don't accept employment benefits -- such as health insurance, paid vacations, or pension benefits -- from your clients; instead, charge your clients enough to purchase these items yourself.
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