Independent Contractor Compliance Blog - by Collabrus™

Tax auditors conducting an employment tax audit look for familiar patterns. The Don’ts in this next group are Red Flags to any tax auditor who is looking at your business. These Red Flags alone will not mean someone is a misclassified worker, but they will cause the auditor to dig deeper.  Something you don’t want….

Don’t assign the same, or similar, work to the independent contractor that you assign to your employees

One clear factor in case law is an employee performs work that’s in the regular line of the company’s business, while an IC performs work that is not directly in line with the main purpose of the company’s business. For example, if you are a bank and make loans to your customers you probably employ a Loan Officer. The Loan Officer is working in the direct line of your business and is most likely an employee. If you have someone classified as an IC performing the work of a Loan Officer it becomes a Red Flag to the tax auditor.

Don’t assign miscellaneous jobs to the IC

This is a path to the Land of Status Drift. I covered Status Drift in Part 3. It’s enough to say at this time that the more you assign miscellaneous jobs to the IC the more the IC begins to look like an employee. This is especially true if the IC has been around for a long time.

Don’t provide fringe benefits to your IC

Employees typically get fringe benefits. Independent contractors are self employed and are responsible to provide for their own benefits at their own expense. If you are providing fringe benefits, you are at risk of creating a misclassified worker.

Don’t provide business cards, or other business logos, to your IC

Your employees represent your business and market your brand name and good will by passing out your business cards and operating under your business name. Independent contractors pay for their own business cards, displaying their own business name and marketing their business-not yours. An auditor will assume someone who is supplied business cards, letter head, wears your company logo on a shirt or a uniform, or who drives a vehicle with your brand name on the door is your employee. It will become your problem to prove otherwise.

What’s next?

In the next installment I’ll cover a major factor in deciding who is an employee or independent contractor-the Risk of Loss.