By G. David Doran
If you're an independent contractor or use the services of one, take a lesson from the following: Eight workers who signed freelance contracts with Microsoft between 1987 and 1990 sued for eligibility to participate in the company's stock purchase program after an IRS audit reclassified them as Microsoft employees. The 9th Circuit Court of Appeals ruled in favor of the workers, saying the so-called independent contractors did much the same work as Microsoft's regular employees. Microsoft then took the case to the U.S. Supreme Court. In January, the Supreme Court let the lower court's decision stand, making Microsoft liable for millions of dollars in back benefits as well as IRS taxes and fines.
How can homebased business owners who hire independent contractors protect themselves from a legal nightmare like this? According to Dennis R. Bonessa, a labor law attorney with Reed, Smith, Shaw and McClay in Pittsburgh, business owners should examine the IRS' 20-question test to make sure the worker is an independent contractor. "It boils down to the ability to control how and when a job is done and whether or not the independent contractor [offers his or her services] to the public," says Bonessa.
If you're an independent contractor working from home, make sure you pass the IRS test. While independent contractors can lose their home office and business deductions if they're reclassified, the company they work for often has to pay retroactive taxes and fines, which may cause it to be gun-shy about hiring independent contractors in the future. For more on independent contractors and the IRS, see "Legal Ease," February.