IRS and Department of Labor (DOL) Guidelines for Independent Contractors
Even though the news may be filled with stories of impeachment, who insulted who and which Twitter feed was the most offensive, as Entrepreneurs the world continues to go on and these are just distractions that keep us from achieving our goals.
With the challenges in finding employees, many of us turned to using independent contractors. Unfortunately, with the changes made by the Department of Labor and the IRS, as to the guidelines for independent contractors, there are risks in using independent contractors. Under IRS and Department of Labor (DOL) guidelines:
- The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
- Someone is not an independent contractor if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if a “contractor” is given freedom of action.
- DOL will look to see if the independent contractor exercises “behavioral control” and “relationship of the parties” as to employees. Examples: training, leading, evaluating, hiring, firing, etc.
- In general, independent contractors are not supposed to oversee company employees.
If the IRS or DOL decide that someone is not an independent contractor, they have the right to “reclassify” that person as an employee. If that happens, the entire compensation paid for the prior 3 years will be treated as wages.
If that happens, here are the penalties to consider:
- 20% - 40% of all contract payments and compensation, plus up to 100%of what should have been the FICA contributions for both employee and employer
- Up to $1,000 in criminal penalties per misclassified employee, per year
- Up to 1 year in prison, per year of violation
The use of independent contractors is still a good idea, but be certain to follow the rules.