Myth #8 - No, not the guy at the left! A worker doing tasks for you who is NOT your employee is called an “independent contractor.” The rules which permit not withholding taxes, social security and Medicare, and paying matching amounts for the last two are stringent. Many employers continue to pay employees as if they were really independent contractors.
Few businesses can properly and lawfully hire persons as independent contractors under Federal tax law and state workers’ compensation laws. We hear this statement, however, often enough to cringe. We know that in all but a few instances, the trap will spring, and some professional will receive a desparate telephone call.
The rules are, as in most tax-related areas, both simple and complex. The simple: an indepedent contractor has to be truly independent. The complex is in what that really means. Roughly stated, determing the status is not easy – and once again we say “Don’t try this at home – hire a professional!” – an independent contractor should have a license for their business; business cards and other documents bearing their name or that of their company; insurance; set their own hours and work methods (within safe parameters); price their services or goods; make profits or sustain losses as any other business does; provide their own tools of the trade; generally must work in areas other than that which your business conducts; etc. For example, as a law firm, if we hire a painter to touch up our office space, that is not our customary business activity. The more business formalities that are observed, the more likely that person is an “independent contractor.”
The consequences of improper classification can be severe, including paying the employer’s share of Social Security and Medicare contribution, and the possibility of paying all the income tax which was due from the “employee” for their employment earnings with you – all this plus penalties and interest. Worse yet is an injury “on the job,” where workers’ compensation should have been provided and wasn’t. Suddenly you may find yourself determined to be that person’s “employer”, and your potential liability is unlimited. With workers’ compensation, you are relieved from liability for anything except egregious gross negligence, which is rare.
Unless you have determined with prudent research by competent specialists that you may employ persons as independent contractors, DO NOT TAKE THIS RISK. It is just too dangerous. For a example of the breadth of this, go to: http://www.boston.com/news/local/massachusetts/articles/2009/08/11/chelsea_strippers_each_entitled_to_thousands_in_class_action_suit_judge_rules/
