Independent contractors require you to follow rules
No one is putting on a full court press, but there are people interested in how you distinguish between independent contractors and employees. Mostly, those people are looking for your money:
•IDES (the Illinois Department of Employment Security) sniffs around fairly regularly. "We have more IDES audits than IRS audits," says accountant John Grebe, principal of Grebe & Associates PC, Wheaton. "In fact, our clients have had more IDES audits in the last couple of years than in the previous 10."
Unemployment compensation claims filed by independent contractors who have finished their assignment for a company and hope to gain unemployment compensation definitely trigger IDES' interest.
•The IRS will sniff, too - especially, says Mike Scialo, if your business "files a lot of 1099s (the tax reporting device for independent contractors)." The IRS, Scialo says, looks for employers who use independent contractors to avoid FICA and related tax payments; a bunch of 1099s is the type of clue the feds look for.
Scialo is tax manager and a accountant at Corbet, Duncan & Hubly PC, an Itasca CPA firm.
•And personal injury lawyers are interested. "PI lawyers are looking for deep pockets," explains attorney Gary Vanek, a partner in the Elgin law firm of Schnell, Bazos, Freeman, Kramer, Schuster & Vanek. "They'll sue the individual (driving your company vehicle and involved in an accident) as an employee" to get your business' pockets to the table.
Keeping the independent contractor/employee distinctions straight should be easy, especially if you check with your accountant or attorney. But whether you make a simple mistake or get caught trying to cut corners, ignoring those distinctions can be expensive: Both IDES and the IRS want their due. So do the personal injury lawyers.
Whether the person you've outsourced work to is classified as an independent contractor or an employee ultimately hinges on answers to 20 questions the IRS uses to determine an individual's work status.
"The biggest thing is control," says Scialo. "If you tell the person when, where and how they must work" then you're in control and they're an employee.
On the other hand, if the person you've hired provides services to other clients and is paid on a contract with no withholding, you're probably OK on the independent contractor status, Vanek says.
It will help if your independent contractor "files a corporate return, also works for (another company), and buys his or her own health insurance," Grebe says.
Scialo says the IRS Web site has a list of the 20 factors that matter in this situation. Grebe -- whose firm, so you know, handles my company's accounting -- has a condensed summary. You can find an Ohio State University fact sheet online at ohioline.osu.edu/cd-fact/1179.html that incorporates the questions the IRS uses to determine if a worker is an independent contractor or employee.