Independent Contractor Compliance Blog

To avoid legal problems, financial penalties and management hassles it vital to treat your IC like an Independent Contractor*—not like an Employee. How? For starters, know and follow the Do’s and Don’ts for Using Independent Contractors…

Over the years I’ve seen companies engage the perfect independent contractor and slowly turn him/her into a misclassified employee because neither party really understood how the working environment and time can change a relationship.

The three month project that never ended

It is common to see the IC, the one you originally engaged for three months to build a new automated inventory control system, helping to plan the year-end office party two years later, and still being treated as an 1099 contractor.

Enter the tax auditor

When a state or federal tax auditor knocks on your door, or you find yourself faced with a misclassification issue—such as injury on the job—you are suddenly faced with an unplanned, retroactive cost you may not be able to afford in today’s highly competitive marketplace.

For example, just one $50 per hour misclassified consultant working 48 weeks per year for three years can cost you over $180,000 in retroactive taxes, penalties and interest if you are audited and assessed by both state and federal tax agencies. Yes, they do share information and you can be assessed by both. If you want to know about the state and federal partnership, see my blog article titled, “IRS and States to Share Employment Tax Examination Results on Misclassified Workers.

How does it go wrong?

It is easier than you may imagine. Many companies treat their IC’s as independent contractors for the payment and accounting functions. However, when it comes to the day-to-day working relationship (which is far more important) they treat the IC too much like a regular employee. They don’t understand, or don’t want to be bothered by, how common law rules apply to an IC or employee. This creates the risk of a costly misclassification conflict with either the worker, or with a government enforcement agency. Often times both.

What’s the solution?

To help you understand how to protect your project and the status of your independent contractors, over the next few weeks I intend to provide you with some:

• Recommended safe practices (The Do’s) to maintain your consultants’ status as independent contractors.
• Common pitfalls (The Don’ts) to avoid for the same reason.

I’ve titled these safe practices and pitfalls as the Do’s and Don’ts for Using Independent Contractors*.

*NOTE: I use independent contractor, IC, contractor, 1099 and consultant interchangeably for these articles.