If you hire independent contractors (ICs), you must be vigilant to ensure that government agencies never reclassify them as employees -- which could subject you to back taxes and penalties. That vigilance must begin even before an IC walks in the door. If you plan to hire an IC, here are two things you can do to make sure you get the relationship off on the right foot.
When you meet with a prospective IC for the first time, you should have the IC complete an independent contractor questionnaire. Design this questionnaire to elicit the sort of information that will establish that the IC is a separate business entity, not just an employee in IC's clothing. You'll want to know:
None of the answers to these questions will provide conclusive evidence that a worker is an employee or an IC. But taken together, this information will help you decide whether the worker is an independent businessperson whom you can safely treat as an IC.
Warning - Employment applications are for employees, not independent contractors. Don't ask an IC to complete one of your standard employment applications. Government agencies may use this as evidence that the IC is actually your employee. Make sure the term "independent contractor" appears prominently in the title of your questionnaire, to avoid any possible confusion.
Ask the IC to provide documents that will enable you to establish that the IC is a separate business entity, should the government ever decide to audit you. Make copies of all such documents and keep them in your files along with the questionnaire described above.
The documents you should request include the following:
Once you have reviewed the IC's questionnaire and documents, you will have to decide whether you can safely treat him or her as an IC -- or whether a government agency is likely to challenge that classification. For information on how government agencies decide whether a worker should be classified as an IC or an employee, see Independent Contractor or Employee: How Government Agencies Make the Call.
If you are satisfied that the worker qualifies as an IC, your next step is to create a written agreement detailing the terms of the project. For tips on drafting an agreement, see Put Your Independent Contractor Agreements in Writing.
If you have serious concerns that government agencies might classify the worker as an employee, you probably shouldn't court trouble by hiring the worker as an IC. Instead, you might consider hiring the worker as an employee -- or, you can thank the worker for his or her time and continue your search for a truly self-employed freelancer.
For detailed information working with independent contractors, freelancers and consultants, get Working With Independent Contractors, by Stephen Fishman (Nolo).