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Know the Rules Before You Hire an Independent Contractor

Part 1 of Series of 3

A number of laws govern whether a worker is an independent contractor (IC) or an employee, and each of these laws has a different way of looking at the issue, for example, the IRS determination vs. your state workers' compensation board. All these different laws are often referred to as "worker classification" rules.

Confusion about the rules can lead to trouble with one agency or another and if you want to avoid problems such as fines and taxes, know the rules of all the agencies before you hire. Because the IRS is what most should consider the "litmus test", and is probably the most important agency to satisfy when it comes to classifying a worker as an IC, we are providing their profile of factors.

The IRS

Under the IRS' test, workers are considered employees if the company they work for has the right to direct and control the way they work - including the details of when, where and how the job is accomplished. In contrast, the IRS will consider workers independent contractors if the company they work for does not manage how they work, except to accept or reject their final results.

In making its determination, the IRS looks at a number of factors, including whether a worker:

• Is paid by the job or by the hour
• Furnishes the tools and materials needed to do the work
• Sets his or her own working hours
• Is told in what sequence or order to work by the hiring company
• Receives training from the hiring company
• Works full-time for the hiring company
• Works for more than one company at a time
• Invests in his own equipment and facilities
• Pays his own business and travel expenses
• Hires and pays assistants
• Provides regular oral or written progress reports to the hiring company
• Provides services that are an integral part of the hiring company's day-to-day operations

If you think the IRS would consider the worker and IC, then you do not need to withhold federal payroll taxes for the worker, including Social Security taxes, federal disability taxes and federal income taxes. If the IRS would not consider the worker an IC, then you should withhold all of these taxes.

To find out more, refer to http://www.irs.gov

To find out more about the workers' compensation test in your state, contact your state department of industrial relations or your state labor department. Your local office of the SBA may also have information, http://www.sba.gov. For more information about the U.S. Dept. of Labor's test for IC's refer to: http://www.dol.gov

(The above information extracted from NOLO, September 2002)