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Business Alert: How to Avoid the Risks Involved with Hiring Independent Contractors
Falls Church, Va. — According to the IRS, 80% of workers currently classified as contractors are actually employees. That means they’re missing out on benefits they can sue to receive. Microsoft was forced to pay $96.9 million to independent contractors, and the IRS is enthusiastic about auditing employees and receiving unpaid payroll taxes and penalties.
“Using independent contractors can be a huge advantage to companies, saving them money and affording their employees flexibility,”
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How can a business make sure the government won’t swoop down and change its contractor’s status? And how can a business avoid being sued by a contractor who claims he’s an employee entitled to benefits? Here are some preventive steps business owners can take:
Enforce the worker-status rules uniformly. Businesses should be consistent in how they categorize everyone within the same class of workers and send 1099s to all contractors to whom they paid more than $600 in the tax year.
Re-examine the benefits policy. Many companies are rewriting their benefits plans so that the plans explicitly exclude contingent workers.
Have an accountant certify your worker classifications. Business owners and managers should obtain letters from their accountants affirming their workers’ statuses. This document will help validate that they made a good-faith effort to adhere to the law.
Sign a contract. Although formal contracts with freelancers won’t offer total protection, they can reduce the odds that businesses face tax penalties when the IRS comes calling. The contract should include a description of the work to be performed, how much the business will pay, the project’s deadlines, a statement that no benefits will be provided and, if necessary, a confidentiality clause to protect proprietary information.
Keep your distance. Managers should avoid trying to control how and when contractors carry out their tasks. The more control they exert, the more likely it is that contractors will be reclassified as their employees.
“Hiring independent contractors can be a headache – but it doesn’t have to be,” DiDomenico says. “Know your rights and responsibilities. Protecting yourself from the risks of hiring independent contractors doesn’t take much, and you’ll be glad you did.”
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