Independent Contractor Compliance Blog

In the last article I told you about the most common worker misclassification trap companies fall into and how the deck is stacked against the company when a worker classification conflict arises. I’ve talked to many clients who believe they can fix this wrong when they have their day in court.

Your day in court

When you go to the tax hearing, or trial, oftentimes you find the consultant is there telling a completely different version of how the project was run than you remember. To prove your case, all you have is the contract, which your attorney drafted, and your faded memory of the details.  Credibility being equal, 99 out of 100 times the judge will go with the consultant’s version.

Now you’re in trouble…

How can you protect yourself from this treachery? First, remember that what is done, is done. But you can protect yourself from this point forward by doing three things:

1. Insure you properly classify consultants based upon the same rules the courts and government tax agencies use, not on common misconceptions.

To accomplish this properly, I recommend you consult with an expert. By this I mean someone who stays current in the area of worker classifications and has real life experience in making these determinations.

2. Install a routine process to periodically review the status of the consultant and the project.

Specifically:

• Conduct a periodic review of the project to guard against Project Drift
• Track the spending of the project to stay within your budget (not exclusively a worker classification issue but still important)
• Conduct a periodic review of the relationship to guard against Status Drift
• If the project gets off track, fix it! Either put it back on track or admit that you want the IC as an employee and begin treating him as such.

3. Create a Compliance File

The universally known facts of today become the lost, arcane knowledge of tomorrow.

A compliance file should be created for each IC that documents all the facts pertaining to the IC determination and the project(s) they have worked on for your company. This file becomes the hard proof that you have done things correctly, and is worth its weight in gold in the event of a compliance audit.

Memories fade and change over time; therefore, every part of the project should be documented to preserve the accurate details of the working relationship while it lives and is fresh in everyone’s mind.  It is important to preserve the knowledge and facts that went into your decision. Later, if necessary, you will be able to produce that documentation to prove you did it right.

As a minimum the file should contain:

• The contract
• Documentation of the contractor’s qualifications as an IC
• A clear description of the project
• Documentation of how the project qualifies for IC status
• The results of the periodic reviews listed above
• A closing document that preserves the details of the successful end of the project

Put on a happy face

Doing this may seem a thankless task today, but if you take these steps you will be smiling when the auditor knocks on your door two or three years from now.

What’s next?

Want to know some employment tax audit secrets?