With all the benefits that come with hiring employees, why even bother with independent contractors? The answer is those same taxing reasons. Independent contractors are clearly cheaper from a tax perspective, says Kaplan. "You can get away with a check for services rendered and absolutely no filing requirements except for a year-end Form 1099." (More about 1099s later.)
The difficulty comes in making sure that person meets the IRS' definition of an independent contractor, and those guidelines are murky, according to Allan Kruger, a principal in accounting firm Kruger & Co., P.A. in Ft. Lauderdale, Florida.
There are 20 factors the IRS uses to determine whether someone is an employee or an independent contractor. (These factors are contained in IRS Publication 937, Employment Taxes and Information Returns, available by calling the Freedom of Information Reading Room at 202-622-5164.) Among the key factors the publication lists:
Who has control? "A worker is an employee if the person for whom he works has the right to direct and control him in the way he works, both as to the final results and as to the details of when, where and how the work is to be done. The employer need not actually exercise control; it is sufficient that he has the right to do so."
Right to fire. "An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract."
Training. "An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods and receive no training from the purchasers of their services."
In addition, says Kaplan, the IRS considers whether the person works full time and whether all the work has to be performed on the employer's premises--both signs of an employee-employer relationship.
Kruger cautions business owners against relying too heavily on any one specific factor. "There are so many different factors. In each circumstance it's difficult to determine what the IRS is going to say," he says. "Even if your person passes the 20-point test, the IRS may not view the results the same way you would."
In fact, adds Satuloff, these guidelines have been applied inconsistently in various IRS districts across the country.