Q: My company manufactures and distributes novelty key chains. We've recruited someone as a salesperson and plan to pay him on a commission basis. Do we have to "hire" this person, or could we just keep him off the books and write a check for services rendered? We'd like to avoid Social Security matching and other headaches that an employee would involve.
A: Ah, wouldn't it be great if we could find a competent person, convince him or her to work for us and never fill out another pesky form? It's every employer's dream.
Unfortunately, life is more complex than that. Taking on an employee means withholding income taxes and Social Security taxes (FICA), paying unemployment taxes (FUTA) and other state and local taxes, plus offering benefits such as sick/vacation days, health insurance and retirement accounts.
But if the job has flexibility and that person won't be sitting around the office like a potted plant, hiring him or her as an independent contractor could be the answer. An independent contractor is just that: someone who works for himself, frequently for more than one company. As James R. Hood, an independent contractor for Strategic Alliance Management in Washington, DC, says, "If you have the guts to do it, turning independent contractor can be your ticket out of Dilbert-land."
Here are some questions the IRS asks in determining whether a new hire is truly an independent contractor or an employee masking as one (so the employer can avoid...well, you know):
1. Does the worker set his or her own hours?
2. Who makes the rules for how and where the work will be done: employer or worker?
3. Does the worker furnish his or her own tools and equipment and hire his own assistants if needed?
4. Does the person have a workplace (home office, for example) that's separate from the employer's premises?
5. Can the individual work for other companies?
6. Is the worker paid on a per-job or a commission basis?
7. Does the person send you invoices for his services?
8. Is there a written "independent contractor" agreement between worker and employer?
If the answer to these questions is yes, you've successfully hired the person as an independent contractor and avoided the employee issues.
One other bonus: The IRS has categories of people it assumes aren't employees. These include direct sellers who sell consumer products outside a retail establishment. If they're paid on commission, as you plan to do, and have a contract stating they're not employees for federal tax purposes (which your independent contractor agreement would state), it looks like you've cleared the hurdles for legitimately hiring your salesperson as an independent contractor.
This isn't the same as hiring someone "off the books," which isn't kosher for either an employee or an independent contractor. Uncle Sam stretches his long bony hand out to both. It's just that you handle the tax issue for employees, while independent contractors pay their own after totaling up income on each Form 1099 received from an employer. (Form 1099 is the independent contractor's equivalent of a W-2.)
So discuss this with your new hire, draft an agreement and go sell those key chains!
Joan E. Lisante is an attorney and freelance writer who lives in the Washington, DC, area.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.