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OK, so you know difference between an independent contractor and an employee, you know advantages and disadvantages of hiring independent contractors and you know dangers of misclassification. How do you protect yourself?
=> Independent Contractor Agreement
First and foremost, arm yourself with IRS' control test factors and tests used by various government agencies in your state. Once you have that information, you can structure your arrangements with your independent contractors accordingly. These arrangements should be reduced to writing, in form of an independent contractor agreement.
An independent contractor agreement should contain a description of services independent contractor is to perform, by when they are to be performed and amount independent contractor is to receive in return for satisfactory service.
This agreement can be very helpful evidence in proving that worker's status was independent contractor rather than employee. Although such an agreement is insufficient by itself (if you nonetheless treat independent contractor as an employee agreement will be worthless for this purpose), if factors weighed by IRS under control test are evenly balanced, an independent contractor agreement may well tip scales in your favor.
Before hiring an independent contractor, put him or her through a few hoops first. It's a good idea to prepare some form of questionnaire to extract sort of information you would need to be able to prove in support of your argument that worker is, in fact, an independent contractor and not an employee. Examples of such information (courtesy of NOLO website - http://www.nolo.com) include:
1. Whether worker has formed a legal entity for his or her business. 2. Whether worker has filed a fictitious business name (also known as a "DBA" or "doing business as"). 3. The worker's business address and telephone numbers. 4. The number of employees employed by business. 5. Whether worker has any professional or business licenses. 6. References from other business for whom worker has performed services as an independent contractor. 7. How worker markets his or her business. 8. Whether worker maintains an office separate from his or her home. 9. A description of equipment and facilities worker owns and will use in project. 10. Whether worker has business cards and stationery etc.. 11. A listing of types of insurance coverage worker has for his or her business.
Request documents that evidence responses to above questions. For example, get copies of fictitious business name statements, professional and business licenses; references; business cards and stationery and insurance policies.
At end of day, whether you hire an employee or an independent contractor is a decision for you and your business. If you feel you can adequately protect yourself against an allegation of misclassification then, by all means, follow independent contractor route if that makes most sense to you. But if you don't feel confident in managing relationship to protect yourself from such a charge, for your own peace of mind, you may be well advised to hire an employee even if that is more expensive up-front. After all, if you get it wrong, you'll be paying those additional costs anyway in form of back-taxes (and interest and penalties to boot).
Elena Fawkner is editor of A Home-Based Business Online ... practical home business ideas for the work-from-home entrepreneur. http://www.ahbbo.com