Why independent contractor?
1. The business will pay less payroll taxes. FICA (7.65%), FUTA (.8%), SUTA (2.5%),
And what are the rules?
1. If the contractor makes under $600 a form 1099-MISC is not required to be filed and when the contractor does not file this income the government loses more tax revenue: Income taxes, licensing taxes, tangible property taxes, self-employment taxes. So the government is auditing for strict compliance.
2. You should always execute a written agreement between the contractor and your business.
3. There are specific characteristics that makes the relationship between the business and the individual a contracting one rather than employment. There is a checklist.
How to get the tax benefit:
Here is a checklist of what to include in the contract:
1. Do not require contractors to comply with rules of when, where and how work is performed
2. Do not require special training
3. Contractors should not be key to the operations ( a company agent)
4. The contractor should not be required to perform the services 100% of the time (him/herself)
5. Contractors should not be supervised or directed by the company employees
6. Contracts should be for a definite period of time (renew contracts)
7. Work schedule is the contractor's decision
8. Company cannot expect full time attention
9. Do not direct sequence of tasks.
10. Pay by job or commission rather than hourly or weekly
11. Reimbursements should not be separate from the contractor's invoice
12. Contractor furnishes tools and materials
13. Contractor should be available to work for more than one company at a time
14. Contractor should submit invoices for work performed
The savings can be great:
As you can see it is important to execute a written contract between the company and the contractor and include as many of the preceding tests in the contractual language.
Not having to be liable for payroll taxes, and employee benefits can be extremely helpful to a small business. But if these tests are not followed, the penalties the IRS can assess, should they decide that you are in an employer role instead, can be devastating. Asking you to go back and prepare/amend quarterly employer payroll tax returns and annual filings including payroll tax penalties and interest can double the cost of filing the individual as an employee in the first place. So you must consider this contractor versus employee relationship very seriously.
We specialize in small businesses and Individual tax planning. If you own your own business, you should have Reinert & Associates, PC help you keep more of what you make.
Visit our website:
https://www.rreinert.net/
Prepared by: Robert Reinert, CPA
