- You had a reasonable basis for classifying the individuals as ICs. For example:
- You relied on a relevant court case, IRS ruling, or the advice of a qualified accountant or attorney;
- The IRS did not reclassify these or similar workers during an earlier audit; or
- It is a standard industry practice to treat certain types of workers as ICs.
- You have consistently treated these and all similar workers as ICs in the past.
- You have consistently filed federal tax returns (Form 1099-Misc.) for these and all similar workers.
Going forward, there are several measures you can take to safeguard against allegations of misclassification:
- Consider engaging only those ICs that are incorporated and, as a result, have been assigned a federal tax ID number. By establishing a "corp-to-corp" relationship, the burden is shifted away from your organization because the individual is considered an employee of his or her own corporate entity.
- Keep IC files separate from employee files. Manage IC files as you would those of any other outside vendor.
- Require that ICs submit invoices for services rendered prior to processing payment.
- Collect documentation that supports the individual's IC status, such as business cards, yellow page listings, marketing collateral, etc.
- Refrain from asking ICs to complete standard "new hire paperwork" such as an employment application and I-9 (immigration) form. Additionally, do not provide them with an employee handbook.
- Avoid having ICs and W-2 employees work "side-by-side" (i.e., performing the same tasks and reporting to the same managers).
- Develop a contract that explicitly reflects the 20 factors described above, with an emphasis on the following points:
- The agreement is limited to a specific term or project and will not automatically "roll over."
- The IC will determine how the work will be accomplished.
- The IC is not prohibited from providing the same or similar services to other companies during the course of the relationship.
- The IC is not covered by the organization's liability, health and worker compensation insurance.
While adhering to IRS guidelines may reduce some of your staffing flexibility, the short-term inconvenience is far less unpleasant than the long-term repercussions of being found non-compliant. That said, the IRS will gladly help you determine the appropriate classification for a worker or group of workers in your organization. Simply complete and submit Form SS-8.
Recommended Reading
Independent Contractor vs. Employee: Get it RightAuthor Gillian Flynn's skillful interview with an employment law attorney - published in a 1997 issue of Workforce Magazine - provides useful insights into properly classifying workers.
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