The War Of Independents

Protect Yourself

Despite specific IRS programs to achieve greater consistency and efficiency and congressional attempts to replace the 20-part test, worker classification issues will continue to plague business owners for a while. As we've seen, simply christening a worker an independent contractor won't protect an employer. And for those who consider themselves independent contractors, a home office by itself means little, especially in our age of easy travel and telecommuting, and particularly in the new training manuals developed for IRS agents policing this area. Still, no matter which side of this equation you're on, you can reduce the risk of reclassification. Here are five strategies that may help you survive an IRS challenge:

1. Plan to use the safe harbor. According to attorney Stephen Fishman, author of Wage Slave No More: The Independxent Contractor's Legal Guide (Nolo Press), it's now easier for businesses to take advantage of Section 530, especially if they plan ahead. For example, a company may establish its "reasonable basis" for treating workers as independents by taking a survey to determine, and then conform to, widespread and long-standing practice in its particular industry. It could also obtain, and rely on, the formal opinion of a lawyer or accountant knowledgeable in this area.

2. Let the independent stay in control. A hiring business shouldn't try to tell an independent how to get the job done. Freelancers should not receive training, have set hours or procedures, or have reporting requirements. Independents should be able to delegate duties freely and hire their own assistants.

3. Structure compensation correctly. An independent should bear the risk of profit or loss. Accordingly, they're best off invoicing their employers per job rather than per hour, per day or per week. Freelancers should receive no benefits or expense reimbursements. Employers should report payments to independent contractors on IRS Form 1099. It also helps to have checks made payable to a company or a dba, or to have the independent contractor incorporate.

4. Hire (or be) a self-reliant contractor. Freelancers should have their own offices, supply their own equipment, pay their own taxes, have their own insurance, work for more than one client, do their own marketing and advertising, and not be integrated into the general business operations of their clients.

5. Have a written contract. Although structuring these relationships correctly is crucial, documenting them also helps. Restate the above elements in your formal agreements. Specify that neither party has the right to terminate the deal unless the other fails to live up to its obligations. Add a statement that one party intends the other to be an independent contractor and not an employee. Don't forget to add a provision regarding the ownership of any copyrights or other intellectual property (patents, trademarks or trade secrets) created during the engagement. "In a close case, a written agreement may tip the balance," says Fishman.

Generally, determining independent contractor status is the employer's headache. In addition to the above, employers should keep accurate records to justify their classifications and establish consistent policies. On the other hand, if you're freelancing, use these guidelines to make your prospective client feel as comfortable as possible about hiring you as an independent contractor. This war of independents is far from over.

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