Your business may benefit from hiring independent contractors to help you achieve your business goals. These individuals or companies provide expertise and extra capacity to help you get projects completed on time. By using independent contractors, your company maintains the flexibility of paying for services when they are needed and avoids employee obligations and expenses.
The relationship between your company and an independent contractor is different from the relationship it has with its employees. If you mistakenly mischaracterize someone you hire as an independent contractor when they really should be characterized as an employee, your company can be subject to significant penalties.
In general, the IRS will focus on the amount of control your business exercises over the worker to determine the proper characterization of the relationship. Some factors to consider include: whether the company directs how the work is to be done, how much on-going training is required, whether the work can be subcontracted out, whether the company requires full-time work or requires certain days or hours of work, whether the work must be performed on-site, whether the company will reimburse business or travel expenses, whether the company provides the necessary tools, equipment and materials and whether the worker is providing simultaneous services for several unrelated companies.
Be sure to have a written agreement with any independent contractor that addresses the following issues.
- Services. Describe the work to be performed and whether the quality of the work must be approved before it can be submitted for payment. Are there deadlines or milestones that must be met? What happens if these are not met? What happens if the work is not deemed acceptable? What warranties or guaranties is the independent contractor making on the work it performs?
- Compensation. Specify the amount that will be paid and when payment will be made. Will you hold back payment based on approvals by other parties?
- Expenses. Who pays for expenses?
- No Benefits. Require the contractor to acknowledge that your company is not providing any benefits, including pension or retirement benefits, health insurance, vacation pay, sick pay, or holiday pay.
- Taxes. Include a statement that the contractor is responsible for all taxes, including federal and state income taxes, sales taxes, and FICA (Social Security and Medicare taxes).
- Relationship. Specify that the consultant is providing services as an independent contractor, not an employee.
- Term and Termination. Define the time period or project you are hiring the independent consultant for and how your arrangement can be terminated.
- Work Product. Clarify who will own the work product developed by the independent contractor. Be sure to identify at what point the work product becomes the company’s property. Require the contractor to cooperate with the company to obtain any patents.
- Confidentiality. Protect your company’s intellectual property by specifying what proprietary information or trade secrets obtained during the working relationship must be kept confidential.
- Disputes. Consider including an arbitration clause requiring that contract disputes be settled by arbitration rather than litigation.
Independent contractor agreements can be tricky. Business owners should consult with their legal and tax advisers for interpretation of specific requirements concerning hiring independent contractors.
For more information, please contact Kathy Tremmel at Tremmel Law, PLLC at (512) 539-0317 or firstname.lastname@example.org.