EnTrends

PROTECTING YOURSELF

OK, so you know the difference between an independent
contractor and an employee, you know the advantages and
disadvantages of hiring independent contractors and you know
the dangers of misclassification. How do you protect yourself?

=> Independent Contractor Agreement

First and foremost, arm yourself with the IRS' control test
factors and the tests used by the various government agencies
in your state. Once you have that information, you can
structure your arrangements with your independent contractors
accordingly. These arrangements should be reduced to writing,
in the form of an independent contractor agreement.

An independent contractor agreement should contain a
description of the services the independent contractor is to
perform, by when they are to be performed and the amount the
independent contractor is to receive in return for satisfactory
service.

This agreement can be very helpful evidence in proving that the
worker's status was independent contractor rather than
employee. Although such an agreement is insufficient by itself
(if you nonetheless treat the independent contractor as an
employee the agreement will be worthless for this purpose), if
the factors weighed by the IRS under the control test are evenly
balanced, an independent contractor agreement may well tip the
scales in your favor.

=> Screening

Before hiring an independent contractor, put him or her through
a few hoops first. It's a good idea to prepare some form of
questionnaire to extract the sort of information you would need
to be able to prove in support of your argument that the worker
is, in fact, an independent contractor and not an employee.
Examples of such information (courtesy of the NOLO website -
http://www.nolo.com) include:

1. Whether the worker has formed a legal entity for his or her
business.

2. Whether the worker has filed a fictitious business name (also
known as a "DBA" or "doing business as").

3. The worker's business address and telephone numbers.

4. The number of employees employed by the business.

5. Whether the worker has any professional or business
licenses.

6. References from other business for whom the worker has
performed services as an independent contractor.

7. How the worker markets his or her business.

8. Whether the worker maintains an office separate from his or
her home.

9. A description of the equipment and facilities the worker owns
and will use in the project.

10. Whether the worker has business cards and stationery etc..

11. A listing of the types of insurance coverage the worker has

for his or her business.

Request documents that evidence the responses to the above
questions. For example, get copies of fictitious business name
statements, professional and business licenses; references;
business cards and stationery and insurance policies.

At the end of the day, whether you hire an employee or an
independent contractor is a decision for you and your
business. If you feel you can adequately protect yourself
against an allegation of misclassification then, by all means,
follow the independent contractor route if that makes

most sense to you. But if you don't feel confident in managing
the relationship to protect yourself from such a charge, for
your own peace of mind, you may be well advised to hire an
employee even if that is more expensive up-front. After all, if
you get it wrong, you'll be paying those additional costs
anyway in the form of back-taxes (and interest and penalties
to boot).

Elena Fawkner is editor of A Home-Based Business Online ...

practical home business ideas for the work-from-home

entrepreneur.

http://www.ahbbo.com