Independent contractors

Tax Tip: Independent contractors

You work hard for your money. Why waste it on costs and penalties?

In this article, we will focus on what every business should know about the secrets of hiring an independent contractor.

Many businesses would rather pay someone as an independent contractor rather than an employee to avoid extra payroll taxes. Other benefits may include not having to pay for workers compensation, vacation, sick leave and other costs.

The IRS has a 20 factor test on what constitutes an independent contractor.

The problem with this test is that the factors can be ambiguous and apply to both an employee as well as an independent contractor. How is a business supposed to know what to do?

Of the 20 factors, I believe the critical three factors that determine whether a person is an Independent Contractor are as follows:

1. Realization of profits or losses.

People who track profits and losses from doing work are independent contractors. Employees do not recognize profit or loss from doing work. They get a paycheck and if they mess up they still get a paycheck unless they get fired of course.

2. Working for more than one firm at a time.

If people perform services for a number of unrelated persons at the same time, they are usually independent contractors although I do understand that people may have 2 even 3 jobs but drawing a paycheck is different than submitting invoices to get paid for the work you perform.

3. Making services available to the general public.

Independent contractors make their services generally available to the public meaning they get a business license, they have a business card, they have a website, they go to networking groups and they market their services.

In my view, this last factor also is a key determiner that the government agencies use in focusing on deciding whether a person is an independent contractor.

No business license, no business card, no website, makes it a bit difficult to argue that you are holding yourself out as a business.

Saving money is as good and maybe better than making money. Knowing how to classify the people you use in your business can save you time and money.

Are You Taking All of the Deductions Available for Your Business?

Take action by creating a long-range plan for your business that will help you keep more money in your pocket rather than the government’s.

Set up a meeting with one of our tax professionals and discuss ways to position your company for success by giving us a call at (760) 579-0079.

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Unless your situation is very straightforward we are well positioned to find ways that will more than compensate you for the time and cost you spend with us.