Working With Independent Contractors

Working With Independent Contractors

by Stephen Fishman

Paperback(Seventh Edition)

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Product Details

ISBN-13: 9781413313987
Publisher: NOLO
Publication date: 08/03/2011
Edition description: Seventh Edition
Pages: 360
Product dimensions: 8.78(w) x 7.08(h) x 0.74(d)

About the Author

Stephen Fishman has dedicated his career as an attorney and author to writing useful, authoritative, and recognized guides on business, taxation, and intellectual property matters for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of 20 books and hundreds of articles, and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Every Landlord s Tax Deduction Guide, Deduct It! Lower Your Small Business Taxes, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants, published by Nolo. You can visit Stephen s website at

Read an Excerpt


There are many benefits to hiring ICs, but there are serious risks as well. No book can tell you whether you should use ICs in your business, but this chapter will help you make an informed decision by summarizing the potential advantages and disadvantages.
Benefits of Using Independent Contractors

It can cost less to use ICs instead of employees because you don't have to pay employment taxes and various other employee expenses for ICs. In addition, you will be less vulnerable to some kinds of lawsuits. Perhaps most importantly, hiring ICs gives you greater flexibility to expand and contract your workforce as needed.
Financial Savings

It usually costs more to hire employees than ICs because, in addition to employee salaries or other compensation, you will have to pay a number of employee expenses. These expenses add at least 20% to 30% to your payroll costs, often more. For example, if you pay an employee $10 per hour, you must pay an additional $2 to $3 or more per hour in employee expenses.

You incur none of these expenses when you hire an IC. Even though ICs are often paid more per hour than employees doing the same work, you will still save money in the long run by using ICs.

In addition to the costs of payroll processing, the most common employee expenses include:

* federal payroll taxes
* unemployment compensation insurance
* workers' compensation insurance
* office space and equipment, and
* employee benefits such as paid vacation and health insurance.

Federal Payroll Taxes

Employers must withhold and pay federal payroll taxes for employees. They must pay a 7.65% SocialSecurity tax and a small-usually 0.8%-federal unemployment tax out of their own pockets. In addition, employers must withhold Social Security taxes and federal income taxes from their employees' paychecks, and periodically hand this money over to the IRS. (See Chapter 3.)

In contrast, you don't have to withhold or pay any federal payroll taxes for ICs. This will help you save money, not only in taxes, but in bookkeeping costs as well.
Unemployment Compensation

Employers in every state are required to contribute to a state unemployment insurance fund on behalf of most employees. The unemployment tax rate is usually somewhere between 2% and 5% of employee wages, up to a maximum amount set by state law. (See Chapter 5 for more on unemployment compensation rules.)
Workers' Compensation Insurance

Employers must provide workers' compensation insurance coverage for most types of employees, to provide some wage replacement and reimbursement of medical bills if an employee is injured on the job. Employers can get workers' compensation insurance either from private insurers or state workers' compensation funds. Premiums can range from a few hundred dollars per year to thousands, depending upon the employee's occupation and a company's claims history. Employers don't have to carry workers' compensation insurance for ICs. (See Chapter 6 for information about state workers' compensation laws.)
Office Space and Equipment

Employers typically provide their employees with workspace and whatever equipment they need to do their jobs. This is not necessary for ICs, who ordinarily provide their own workplaces and equipment. Office space is usually an employer's second biggest expense; only employee salaries and benefits cost more.
Employee Benefits

Although not required by law, employers usually provide their employees with benefits such as health insurance, paid vacations, sick leave, retirement benefits, and life or disability insurance. You need not-and should not-provide ICs with such benefits.

Health insurance costs, in particular, can be enormous. Many employers are cutting back on health insurance benefits for employees in attempts to save money. But these kinds of cutbacks can have high costs in employee discontent.
Reduced Exposure to Lawsuits

When you hire employees, you may be subject to some types of legal claims that ICs can't make against you.
Labor and Antidiscrimination Laws

Employees have a wide array of rights under state and federal labor and antidiscrimination laws. Among other things, these laws:

* impose a minimum wage and require many employees to be paid time-and-a-half for overtime
* make it illegal for employers to discriminate against employees on the basis of race, religion, gender, national origin, age, and disability
* protect employees who wish to unionize, and
* make it unlawful for employers to knowingly hire illegal aliens.

In recent years, a growing number of employees have brought lawsuits against employers alleging violations of these laws. Some employers have had to pay hefty damages to their employees. In addition, various watchdog agencies, such as the U.S. Department of Labor and the U.S. Equal Employment Opportunity Commission, have authority to take administrative or court action against employers who violate these laws.

Few of these antidiscrimination and employment laws apply to ICs, so you have much less exposure to these kinds of employee claims and lawsuits when you use ICs instead of employees. (See Chapter 8.)
Wrongful Termination Liability

Employees can also sue for wrongful termination. In these legal actions, an employee claims that his or her firing was illegal or constitutes a breach of contract. Wrongful termination laws vary from state to state. Under some circumstances, for example, it might be a breach of contract for you to fire an employee without good cause. To guard against wrongful termination claims, employers must carefully document the reasons for firing an employee, so they can defend their actions in court, if necessary.

ICs cannot bring wrongful termination lawsuits. However, there usually are contractual restrictions on when you can fire an IC. For example, your contract might state that you can fire an IC only with written notice, or only for failing to meet his or her obligations under the contract. If you disregard these limits, you could face a breach of contract lawsuit.

Table of Contents

Your Legal Companion for Working With Independent Contractors     1
Benefits and Risks of Working With Independent Contractors     3
Benefits of Using Independent Contractors     4
Risks of Using Independent Contractors     7
The Common Law Test     11
When a Legal Test Is Necessary     12
The Right of Control Is Key     14
Factors for Measuring Control     15
How the IRS Classifies Workers     25
Four Steps to Classification Under the IRS Rules     26
Check Statutory Independent Contractor Rules     29
Analyze the Worker Under the Common Law Test     32
Check Statutory Employee Rules     50
Check the Safe Harbor Rules     56
IRS Audits     71
Why Audits Occur     72
Audit Basics     72
The Classification Settlement Program     78
IRS Assessments for Worker Misclassification     81
Penalties for Worker Misclassification     85
Interest Assessments     87
Criminal Sanctions     87
Retirement Plan Audits     88
Worker Lawsuits for Pensions and Other Benefits     89
State Payroll Taxes     91
StateUnemployment Compensation     92
State UC Classification Tests     94
State Disability Insurance     104
State Income Taxes     105
Workers' Compensation     107
Basics of the Workers' Compensation System     108
Who Must Be Covered     110
Exclusions From Coverage     110
Classifying Workers for Workers' Compensation Purposes     112
If Your Workers Are ICs     122
Obtaining Coverage     124
Hiring Household Workers and Family Members     125
Household Workers     126
Family Members as Workers     136
Labor and Antidiscrimination Laws     141
Federal Wage and Hour Laws     142
Federal Labor Relations Laws     147
Family and Medical Leave Act     148
Antidiscrimination Laws     148
Worker Safety Laws     151
Immigration Laws     152
Intellectual Property Ownership     153
What Is Intellectual Property?     154
Laws Protecting Intellectual Property     154
Copyright Ownership     155
Trade Secret and Patent Ownership     161
Strategies for Avoiding Trouble      163
Hiring Incorporated Independent Contractors     164
Employee Leasing     170
Procedures for Working With Independent Contractors     177
Before Hiring an IC     178
While the IC Works for You     181
After the IC's Services End     184
Independent Contractor Agreements     193
Using Written Agreements     195
Drafting Agreements     197
Essential Provisions     201
Optional Provisions     220
Sample IC Agreement     224
Agreements for Specialized ICs     229
Help Beyond This Book     233
Finding and Using a Lawyer     234
Help From Other Experts     236
Doing Your Own Legal Research     237
How to Use the CD-ROM     245
Installing the Form Files Onto Your Computer     246
Using the Word Processing Files to Create Documents     247
Forms on the CD-ROM     249
Contractor's Screening Documents     251
Independent Contractor Questionnaire     253
Documentation Checklist     255
Worker Classification Checklist     257
Index     261

What People are Saying About This

Barnard Kamoroff

"This is the most comprehensive and up-to-date information on the subject anywhere."--(Barnard Kamoroff, CPA, author of Small Time Operator)

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