EnTrends

=> Equipment and Materials

In addition, you don't have to provide office space or materials

and equipment to independent contractors. As independent

contractors (who may also go by the terms "freelancers",

"consultants", "self-employed", "business owners" etc.) are

self-employed business people, they have their own "tools of
the trade". If they're website designers, they have their own
office space, computer and printing equipment. If they're
gardeners, they have their own lawn mower, whipper-snipper,
wheelbarrow and pruning shears.

=> Legal Liability

At law, an employer is vicariously liable for the torts of his or

her employees. This means that if you hire an employee
gardener who accidentally runs over your customer's pet cat in
the driveway of her home when the customer had made it clear
that your employees are always to park in the street, in addition
to suing your employee for negligence, she can also sue you,
the employer, as you are vicariously responsible for the acts of
your employees. (And, by the way, this applies whenever your
employee is acting within the scope of employment, whether
under your express instruction

or not. If your employee has a car accident when traveling
between jobs and his negligence at least partially caused the
accident, you're responsible to the same extent as the
employee.)

This is generally not the case with an independent contractor
unless the independent contractor has been engaged to perform
an inherently dangerous activity (such as blasting) or you have
attempted to delegate to your independent contractor a non-
delegable duty (such as keeping a rental property you own in
good repair for the benefit of the tenant).

In addition to minimizing legal liability for torts, hiring
independent contractors also minimizes your liability for other
types of lawsuits such as wrongful termination or job
discrimination.

DISADVANTAGES OF INDEPENDENT CONTRACTORS

There are two main disadvantages to hiring independent
contractors versus employees.

=> Misclassification

Far and away the most serious disadvantage is if you
misclassify employees as independent contractors. Merely
labeling a worker as an independent contractor is not enough.
They must actually be an independent contractor.

If you do misclassify an employee as an independent
contractor, you must pay the IRS all back-taxes owed, plus
interest, plus penalty

(12% - 35% of the total tax bill).

Also, you expose yourself to an increased risk of state audits
when your terminated independent contractor files for
unemployment benefits. Never mind that you and your
independent contractor intended that there be no
employer/employee relationship, many's the disgruntled
independent contractor who unilaterally decides to

recategorize the relationship as one of employer/employee
when the spectre of unemployment benefits raises its pretty
head. In such situations, you'd better be able to protect
yourself by proving that the arrangement was for an
independent contractor and not an employee.

=> Legal Liability

Unlike an employee who is limited to workers' compensation

benefits, an independent contractor can sue you for
negligence if they're injured on the job. That's what liability
insurance is for though.

DETERMINING WHETHER JOE IS EMPLOYEE OR
INDEPENDENT CONTRACTOR

Unfortunately, as far as the various government agencies are
concerned, there is not one single test that determines
whether Joe is your employee or an independent contractor.
Even more difficult, it is quite possible that for the purposes
of one government agency Joe is considered to be an
independent contractor while for another he is treated as an
employee.

=> The IRS/Common Law "Control" Test

The IRS follows the common law "control" test for
determining whether someone is an employee or independent
contractor. This test looks at 20 factors as being indicative
(and only indicative) of whether the person is an employee or
independent contractor. The test basically involves a
balancing of these factors -- which way does the scale tip?

Here are the IRS factors:

1. Whether the worker can earn a profit or suffer a loss from
the activity (if so, the more likely it is that the worker is an
independent contractor).

2. Whether the worker is told where to work (indicative of
employee status).

3. Whether the worker offers his or her services to the general

public (indicative of independent contractor status).

4. Whether the worker can be fired by the hiring firm.

5. Whether the worker furnishes the tools and materials
needed to do the work (indicative of independent contractor
status).

6. Whether the worker is paid by the job or by the hour
(independent contractors are more likely to be paid by the
job; employees by the hour).