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Hiring Independent Contractors—The Employer’s Legal Guide, 4th edition by attorney Stephen Fishman Edited by attorney Amy DelPo Fourth Edition MAY 2003 Editor AMY DELPO Cover Design TONI IHARA Illustrations MARI STEIN Book Design TERRI HEARSHSTEPHANIE HAROLDE Proofreading ROBERT WELLS CD-ROM Preparation JENYA CHERNOFF & ANDRÉ ZIVKOVICH Index JANET PERLMAN Printing ARVATO SERVICES, INC. Fishman, Stephen. Hiring independent contractors : the employers’ legal guide / by Stephen Fishman.— 4th ed. p. cm. Includes index. ISBN 0-87337-918-7 1. Independent contractors—Legal status, laws, etc.—United States—Popular works. 2. Witholding tax—Law and legislation—United States—Popular works. I. Title. KF898.F57 2003 346.7302’4—dc21 2003041281 Copyright © 1996, 1997, 2000 and 2003 by Stephen Fishman. ALL RIGHTS RESERVED. Printed in the USA. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electroni
Chapter 1: Why You Need This Book Overview This is a book about the legal ins and outs of hiring and working with independent contractors (ICs)—people who contract to work for others without having the legal status of an employee. You need this book if you work with or plan to work with independent contractors. This book serves as a complete legal guide to safely hiring and using independent contractors. It explains how to determine whether a worker should be classified as an independent contractor or employee, how to document your classification decision and how to reduce the chances of being subject to or losing an IRS or other government audit. This book is for business owners, top management and personnel managers. But they are not the only ones who need to know how to hire and deal with independent contractors. For a worker to qualify as an IC, he or she must be treated like one. Business managers at all levels must understand how to treat independent contractors, or risk inadvert
Chapter 1: Why You Need This Book
A. What Are Independent Contractors?An independent contractor is a person who contracts to perform services for others, but who does not have the legal status of an employee. Most people who qualify as independent contractors follow their own trade, business or profession—that is, they are in business for themselves. This is why they are called “independent” contractors. They earn their livelihoods from their own independent businesses instead of depending upon an employer to earn a living. Good examples of ICs are professionals with their own practices—for example, doctors, lawyers, dentists and accountants. You may have many choice names for your dentist, but “employee” is probably not one of them. If your dentist has his or her own practice, he or she is an independent businessperson offering dental services to the public, not your employee. However, a worker doesn’t have to be a highly educated professional to be an IC. The person you hire to paint your office or mow your lawn can
B. Why Hire Independent Contractors?There are numerous reasons why you might choose to hire an independent contractor for a job. These are discussed in more detail in Chapter 2. Often the biggest reason that a company wants to classify a worker as an independent contractor rather than as an employee, however, is that independent contractors tend to be less expensive than employees. To use an independent contractor, companies simply need to pay whatever the IC charges them for the job. With employees, however, there are a number of additional costs. Employers must withhold federal and state income taxes from their employees’ paychecks, and they must pay to the government fees and taxes for Social Security, Medicare, unemployment insurance and workers’ compensation insurance. In addition, an employer might choose to provide certain benefits to employees, such as health insurance, stock options, retirement benefits, paid sick leave and paid vacation time. ICs also offer flexibility. A com
C. Who Decides Whether a Worker Is an Independent Contractor? Initially, it’s up to you to decide whether to classify a worker as an IC or employee. But your decision is subject to review by the Internal Revenue Service (IRS) and other state and federal government agencies. Unfortunately, there is no single test used to determine when workers are and are not ICs. Instead, different, although often similar, legal tests are used by various government agencies and courts to determine worker status. These government agencies include: the IRS (see Chapter 4 for information on how the IRS classifies workers) your state’s unemployment compensation insurance agency (see Chapter 6 for information on various state rules) your state’s workers’ compensation insurance agency (see Chapter 7 for information on state workers’ compensation rules) your state’s tax department (see Chapter 6 for more about this), and the U.S. Labor Department (see Chapter 9 for information on the Labor Department rules).
D. Questions to Answer Before Hiring Any WorkerAs you may have guessed by now, whether a worker is an IC or employee is not one question, but many. Before you hire any worker, you should answer all the questions listed below. Rest assured that this book gives detailed explanations and guidance in answering each question for your work situation. Will the IRS consider the worker an IC? If so, you won’t need to withhold and pay federal payroll taxes for the worker, including Social Security taxes, federal disability taxes and federal income tax withholding. If the worker is an employee, you will. (See Chapter 4 for information on the IRS rules.) Will your state unemployment compensation agency consider the worker an IC? If so, you won’t need to pay for state unemployment compensation coverage. Otherwise, you will. (See Chapter 6 for state unemployment compensation rules.) If your state has income taxes, will your state tax department consider the worker an IC? If so, you won’t need to wit
Icons Used in This BookCaution A potential problem. See an Expert An instance when you may need the advice of an attorney or other expert. Resources Suggests books, websites or other resources that may be of use. Document Signals that you can find a particular resource in one of the appendixes at the back of the book. CD-ROM/Document Signals that you can find a particular resource in one of the appendixes and/or at a named agency and/or on the CD-ROM at the back of the book. Tip Provides ideas and strategies for dealing with certain situations.
Icons Used in This Book
Chapter 2: Benefits and Risks of Hiring Independent Contractors There are many benefits to hiring ICs, but there are serious risks as well. No book can decide for you whether to use ICs in your business. But this chapter helps you make your own informed decision by summarizing the benefits and risks that may be involved. A. Benefits of Using Independent Contractors It can cost less to use ICs instead of employees because you don’t have to pay employment taxes and various other employee expenses. In addition, you will be less vulnerable to some kinds of lawsuits. Perhaps most importantly, however, hiring ICs gives hiring firms greater flexibility in expanding and contracting the workforce. 1. Financial Savings It usually costs more to hire employees than ICs because, in addition to employee salaries or other compensation, you usually have to pay a number of employee expenses. These expenses add at least 20% to 30% to your payroll costs, often more. For example, if you pay an employee $1
Chapter 2: Benefits and Risks of Hiring Independent Contractors
B. Risks of Using Independent ContractorsAfter reading about the possible benefits you can get from ICs, you might be thinking: “I’ll never hire an employee again; I’ll just use independent contractors.” But be aware that there are some substantial risks involved in classifying workers as ICs. 1. Federal Audits The IRS wants to see as many workers as possible classified as employees, not ICs, so that it can immediately collect taxes based on payroll withholding. Being pegged as employees also makes it far more difficult for workers to under-report their income or otherwise evade taxes. In recent years, the IRS has mounted an aggressive attack on employers who, in its view, misclassify employees as ICs. If the IRS audits your business and determines that you have misclassified employees as ICs, it may impose substantial interest and penalties. Such assessments can easily put a small company out of business. The owners of an unincorporated business may be held personally liable for such
Chapter 3: The Common Law Test A worker is not an independent contractor simply because you say so. Courts and government agencies will determine the worker’s status by applying a legal worker classification test. There are all sorts of classification tests, and we will introduce you to all of them in this book. In this chapter, however, we take a close look at the most frequently used test—the common law test. As you read through this book, you may see that one agency or another in your state uses this test or some form of it. Although each agency that uses the common law test puts its own spin on it, they all apply essentially the same criteria and theories. One of the most well-known agencies that uses the common law test is the IRS. Because the IRS test is so important and crucial to worker classification, we devote an entire chapter—Chapter 4—to that particular use of the common law test. If you are looking for guidance on applying the IRS test or on classifying a worker for feder
Chapter 3: The Common Law Test
B. The Right of Control Is KeyThe common law test is based on a very simple notion: Employers have the right to tell their employees what to do. The employer may not always exercise this right—for example, if an employee is experienced and well trained, the employer may not feel the need to closely supervise him or her—but the employer has the right to do so anyway. Under the common law test, workers are employees if the people for whom they work have the right to direct and control them in the way they do their jobs—both as to the final results and as to the details of when, where and how the work is performed. EXAMPLE: Mary takes a job as a hamburger cook at the local AcmeBurger. AcmeBurger personnel carefully train her in how to make an AcmeBurger hamburger, including the type and amount of ingredients to use, the temperature at which the hamburger should be cooked and so forth. Once Mary starts work, Acme-Burger managers closely supervise how she does her job. Virtually every aspe
C. Factors for Measuring ControlThe difficulty in applying the common law test is deciding whether a hiring firm has the right to control its workers. The government agencies you have to deal with can’t look into your mind to see whether the right to control exists. They must rely primarily on indirect or circumstantial evidence indicating control or lack of it—for example, whether you provide a worker with tools and equipment, pay by the hour or have the right to fire the worker. This is what government auditors will be asking you about if you’re audited. To evaluate whether a worker passes muster as an IC, you need to examine these factors. The fact that you may know in your heart that you do not control a worker is not sufficient. What matters is how your relationship with the worker appears to a government auditor who doesn’t know you or the worker. Government auditors examine a number of different factors to determine whether a hiring firm has the right to control a worker. The fo
Chapter 4: Federal Taxes and the IRS Rules Overview Perhaps the most important reason to classify workers correctly is to make sure you abide by federal payroll tax rules. These are by far the biggest taxes that you will have to pay for a worker who is an employee—and they will carry the biggest fine if you misclassify a worker as an independent contractor. The heavy hand in all of this is the U.S. Internal Revenue Service. This is the agency that enforces the federal payroll tax rules, and it is the agency that will audit you and levy fines against you if you go astray of those rules. If you learn only one set of rules for determining who is and who is not an independent contractor in your workforce, the IRS set of rules should be the one. In this chapter, we explain to you how to determine whether a worker is an independent contractor or employee under the IRS rules. For state tests, see Chapters 6 and 7. CD-ROM/Document The IRS provides detailed information about federal payroll ta
Chapter 4: Federal Taxes and the IRS Rules
A. Four Steps to Classification Under the IRS Rules To determine whether a worker is an employee or independent contractor in the eyes of the IRS, you must go through the following four steps: Step One: Check to see if the worker is a statutory independent contractor—that is, someone who is an IC simply because the law says so. Three categories of workers can be statutory ICs: direct sellers, licensed real estate agents and companion sitters. (See Section B, below, for more information about statutory ICs.) If the worker is not a statutory independent contractor, go on to Step Two. If the worker is a statutory IC, do not proceed to Step Two. You can treat the worker as an IC, and you don’t have to pay or withhold federal payroll taxes. Step Two: Apply the IRS common law test to determine whether the worker is an IC or employee. (See Section C, below, for information about the IRS common law test.) If you are certain the worker should be classified as an IC under these rules, proceed to
B. Step One: Check Statutory Independent Contractor RulesTo be a statutory IC, the worker must fall into one of the categories discussed below and must meet the following two threshold requirements: the worker’s pay must be based on sales commissions and not on the number of hours worked, and there must be a written contract with the hiring firm providing that the worker will not be treated as an employee for federal tax purposes. (See Chapter 13 for guidance on creating a written independent contractor agreement.) The IRS calls these workers “statutory non-employees,” which is bureaucratese for ICs. The fortunate employers of these workers need not pay FICA or FUTA taxes or withhold federal income taxes. Caution Don’t Forget State Taxes These rules apply only to federal taxes—Social Security (FICA), Federal Unemployment Tax (FUTA) and federal income tax withholding. You may still have to pay state payroll taxes and provide workers’ compensation coverage depending on how those tests c
C. Step Two: Analyze the Worker Under the Common Law Test In cases other than statutory ICs (see Section B, above) and statutory employees (see Section D, below), the IRS uses a test called the common law test to determine a worker’s status for federal payroll tax purposes. This test is also called the right of control test because the goal of this test is to determine whether the hiring firm has the right to control the worker on the job. If so, the worker is an employee; if not, the worker is an IC. The IRS looks at three areas to determine whether a hiring firm has the right to control a worker. These are: behavioral control on the job financial control, and the firm’s relationship with the worker. The following chart shows the primary factors the IRS looks at for each area. Primary IRS Common Law Factors BEHAVIORAL CONTROL A worker will more likely be considered an IC if you: A worker will more likely be considered an employee if you: Factors that show whether a hiring firm has the
D. Step Three: Check Statutory Employee RulesThis step applies only if you’ve determined that a worker who is an IC under the common law test discussed in Step Two (see Section C, above) falls into one of the following categories: corporate officers (see Section 1, below) home workers (see Section 2, below) drivers who distribute food products, beverages or laundry (see Section 3, below) full-time life insurance salespeople (see Section 4, below), and traveling or city salespeople (see Section 5, below). If a worker you classify as an IC under the common law test comes within one of these categories, and if the additional requirements discussed below are met, the worker is a statutory employee. Statutory employees must be treated as employees for FICA purposes, so you must pay half of their Social Security and Medicare taxes yourself and withhold the other half from their paychecks. You must also pay federal unemployment taxes for statutory employees. You don’t have to withhold federal
E. Step Four: Check the Safe Harbor Rules The employer’s Safe Harbor is a set of legal protections found in a footnote to the Internal Revenue Code. It is called Safe Harbor protection because it provides employers with a refuge from the cold winds and turbulent waters of an IRS audit. If you meet the three requirements for Safe Harbor protection discussed below, the IRS can’t impose assessments or penalties against you for worker misclassification, and you can safely and confidently treat the workers involved as ICs. The Safe Harbor was intended to help employers, who often have a difficult time determining how to classify their workers under the IRS common law test. If the Safe Harbor requirements are met, an employer may treat a worker as an IC for payroll tax purposes even if the worker should have been classified as an employee under the common law test discussed in Step Two. Unfortunately, experience has shown that few employers are able to take advantage of the Safe Harbor. Most
Chapter 5: IRS Audits This chapter provides an overview of IRS audits and explains the considerable assessments and penalties that may be imposed on companies that misclassify workers. It also describes an IRS initiative called the Classification Settlement Program, or CSP, that allows many hiring firms to pay reduced assessments if they agree to reclassify the workers involved as employees. Resources Dealing with IRS audits is a complex subject. This chapter does not cover the entire audit process in detail. For detailed information on handling IRS audits, see Tax Savvy for Small Business, by attorney Frederick W. Daily (Nolo). A. Why Audits Occur Whenever you classify a worker as an IC, you become a potential IRS target. The IRS would prefer all workers to be classified as employees, not ICs. That way, it could collect workers’ income and Social Security taxes directly from their employers through payroll withholding. If you stay in business long enough, and if you have ICs, it’s li
Chapter 5: IRS Audits
B. Audit BasicsAn audit is an examination by the IRS of your business, its tax returns and the records used to create the returns. The IRS can audit your business for many reasons—for example, to determine whether: your business has paid the correct employment taxes for employees and filed the proper forms you’ve withheld the proper income taxes from employees’ pay, or your employee pension plan meets the federal requirements for tax qualified status. (See Section H.) 1. Who Gets Audited There are a number of ways you can be chosen by the IRS for an employment tax audit. You may be chosen for a general tax audit by the IRS computer; a small business has about one chance in 75 of being chosen in any year. The IRS may receive complaints from disgruntled workers or even business competitors that you are misclassifying workers. You may be in an industry that has worker classification practices the IRS is targeting. In past years, the IRS has targeted hair salons, trucking firms, couriers,
C. The Classification Settlement ProgramWhen the IRS determines that hiring firms have misclassified employees as ICs, the Classification Settlement Program (or CSP) gives the firms the chance to pay reduced assessments in return for agreeing to classify the workers involved as employees in the future. The program is intended to encourage hiring firms to resolve worker classification cases as quickly as possible, saving themselves and the IRS time and money. 1. When the CSP Is Used The CSP comes into play only if the IRS determines that you don’t qualify for Safe Harbor protection and that the workers involved don’t qualify as ICs under the common law test. In this event, the examiner will determine if you qualify for a CSP offer and make one if you do. To qualify, you must have filed the required 1099 forms for the workers involved. However, your failure to file a small number of 1099 forms will not disqualify you from the CSP. EXAMPLE: The Acme Factory Outlet Store treated 150 worke
D. IRS Assessments for Worker MisclassificationThe assessments the IRS can impose for worker misclassification vary enormously, depending upon whether the IRS views your misclassification as intentional or unintentional. The most strict penalties, of course, are imposed for intentional misclassification—where you knew the workers were your employees but classified them as ICs anyway to avoid payroll taxes. The IRS will likely conclude your misclassification was intentional if you admit you knew the workers were employees or if it should have been clear to any reasonable person that the workers were employees under the common law test. EXAMPLE: Bolo Press, a publisher of sports books, has a six-person production department. Bolo reclassifies its production employees as ICs so it can stop paying payroll taxes for them. After the reclassification, Bolo’s owners treat the production workers just the same as when they were classified as employees—they tell the workers what time to come in
E. Penalties for Worker MisclassificationIn addition to the assessments discussed above, the IRS has the option of imposing an array of other penalties on hiring firms that misclassify workers. 1. Trust Fund Recovery Penalty As far as the IRS is concerned, an employer’s most important duty is to withhold FICA and income taxes from its employees’ paychecks and pay the money to the IRS. Employee FICA and federal income taxes are also known as trust fund taxes because the employer is deemed to hold the withheld funds in trust for the U.S. government. The IRS considers failure to pay trust fund taxes to be a very serious transgression. The IRS may impose a penalty known as the trust fund recovery penalty, formerly the 100% penalty, against individual employers or other people associated with the business. These are people the IRS deems responsible for failing to withhold employee FICA and federal income taxes and pay the withheld sums to the IRS. Failure to pay payroll taxes is willful if
F. Interest AssessmentsThe IRS can impose interest on employment tax assessments and penalties. The interest rate is adjusted every three months and compounded daily. It is currently around 9%. The Bottom Line: All You Could Owe Factoring in all these assessments, penalties and interest, you can make a rough estimate of what you’ll have to pay. If the IRS determines you unintentionally misclassified a worker for whom you filed all required 1099 forms, you’ll have to pay about 20 cents for every dollar you paid the worker, and 25 cents for every dollar if you didn’t file 1099 forms. But if the IRS finds your misclassification intentional, you’ll have to pay about 50 cents for each dollar you paid the worker.
G. Criminal SanctionsIn rare cases where a hiring firm has intentionally misclassified workers, the IRS may conduct a criminal investigation and have the U.S. Justice Department prosecute. Criminal fines and even jail time can be imposed if you’re convicted of tax fraud.
H. Retirement Plan AuditsIf your company has a retirement plan, you should be concerned about IRS retirement plan audits. Retirement plans are not audited as part of an ordinary business or employment tax audit. Instead, the IRS has specially trained revenue agents in every district just for retirement plan audits. This type of audit may derive from a prior business audit or from a review of annual IRS tax reporting Form 5500, which is required for most retirement plans. Hiring firms with tax qualified retirement plans may have special problems with retirement plan audits where they classify workers as ICs. 1. Tax Qualified Retirement Plans A tax qualified retirement plan is a retirement plan that covers business owners and employees and that satisfies the requirements of the federal Employee Retirement Income Security Act, or ERISA. That law is enforced by the U.S. Department of Labor, the IRS and the Pension Benefit Guarantee Corporation. Contributions to a tax qualified retirement p
I. Worker Lawsuits for Pensions and Other BenefitsA company that provides its employees with pensions, stock options and other benefits faces the possibility that workers it has incorrectly classified as ICs will file expensive lawsuits asserting that they are really employees and therefore entitled to the benefits. This happened in a highly publicized case involving the Microsoft Corporation in which the company was sued by several workers it had improperly classified as ICs for federal payroll tax purposes. After lengthy litigation, the court held that the workers were entitled to full employee benefits for the entire time they had worked for Microsoft, including coverage under Microsoft’s discount stock purchase plan and 401(k) plan. (Vizcaino v. Microsoft, 173 F.3d 713 (9th Cir. 1999).) Companies that offer generous employee retirement or stock options plans like Microsoft’s can avoid the problems Microsoft encountered by making sure that their plan eligibility provisions explicitl
Chapter 6: State Payroll Taxes Overview Employers in all states must pay and withhold state payroll taxes for employees. These taxes include: state unemployment taxes (in all states) (see Section A, below) state income tax withholding (in most states) (see Section E, below), and state disability taxes (in a few states) (see Section D, below). In contrast, you do not have to withhold state payroll taxes for ICs. Thus, whenever you hire a worker, you must decide whether the worker is an employee or IC under your state’s payroll tax laws. This is not a decision to be taken lightly, because state payroll tax audits are the most common type of audits you have to fear. Caution Don’t Forget Workers’ Compensation In addition to state payroll taxes, you must purchase workers’ compensation insurance for employees (but not for independent contractors). Often, this involves analyzing workers under yet another test. We discuss this issue in detail in Chapter 7.
Chapter 6: State Payroll Taxes
A. State Unemployment CompensationFederal law requires that all states provide most types of employees with unemployment compensation insurance. Employers are required to contribute to a state unemployment insurance fund. Employees make no contributions, except in Alaska, New Jersey, Pennsylvania and Rhode Island where small employee contributions are withheld from employees’ paychecks by their employers. Unemployment compensation (UC) is only for employees; ICs cannot collect it. Firms that hire ICs don’t have to pay unemployment compensation taxes for them. This is one of the significant benefits of classifying workers as ICs, since unemployment compensation taxes typically amount to hundreds of dollars per year for each employee. The Cost of Unemployment Compensation Insurance The unemployment tax rate varies from state to state and depends partly on the age of the hiring firm, the type of industry and how many claims have been filed by a firm’s employees. Employers who maintain a s
B. State UC Classification TestsEach state has its own unemployment compensation law administered by a state agency, often called the department of labor. Each state’s law defines who is and who is not an employee for unemployment compensation purposes. Almost all states fall into one of three categories: the common law test a three-part ABC test, and a modified ABC test. Find the category for your state on the list below and then read the appropriate discussion in Section 1, 2 or 3. This should give you a general idea of whether a particular worker is an employee or IC for UC purposes. For more detailed information, contact the unemployment compensation agency in your state. Most of these agencies have websites and free information pamphlets. (See Section C for contact details.) Michigan, Oregon, Wisconsin and Wyoming do not fit into any of the three standard categories. We discuss the tests for these states in Section 4, below. 1. The Common Law Test Many of the most populous states—
C. State Unemployment Tax AgenciesBelow is a list of state unemployment tax agencies. If the telephone number listed for your state is a long distance call from your area, check your telephone book under the name of your state’s agency to find a local number. State Unemployment Tax Agencies Alabama Department of Industrial RelationsMontgomery, AL334-242-8025http://dir.state.al.us Alaska Employment Security DivisionJuneau, AK 99802-5509907-465-2712www.labor.state.ak/esd Arizona Department of Economic SecurityPhoenix, AZ602-952-1815www.de.state.az.us Arkansas Employment Security DepartmentLittle Rock, AR501-682-3200www.state.ar.us/esd/index.htm California Employment Development DepartmentSacramento, CA800-300-5616www.edd.cahwnet.gov Colorado Department of Labor and EmploymentUnemployment Insurance Tax BranchDenver, CO800-480-8299 or 303-318-9100www.coworkforce.com/UIT Connecticut Unemployment Tax DivisionLabor Department Administrative OfficesWethersfield, CT860-566-1018 or 203-248-4270w
D. State Disability Insurance Five states have disability insurance that provides employees with coverage for injuries or illnesses that are not related to work. These states are: California, Hawaii, New Jersey, New York and Rhode Island. Puerto Rico also has a disability insurance program. In these states, employees make disability insurance contributions, which are withheld from their paychecks by their employers. Employers must also make contributions in Hawaii, New Jersey and New York. Except in New York, the disability insurance coverage requirements are the same as for UC insurance. (New York uses the common law right of control test, the same test it uses for workers’ compensation coverage.) If you pay UC for a worker, you must withhold and pay disability insurance premiums as well. In California, New Jersey and Rhode Island, disability insurance is handled by the state unemployment compensation agency. The same employee records are used for UC and disability—and employers submi
E. State Income TaxesAll states except Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have income taxation. If you do business in a state that imposes state income taxes, you must withhold the applicable tax from your employees’ paychecks and pay it over to the state taxing authority. No state income tax withholding is required for workers who qualify as ICs. It’s very easy to determine whether you need to withhold state income taxes for a worker: If you are withholding federal income taxes, then you must withhold state income taxes as well. Contact your state tax department for the appropriate forms. But if a worker qualifies as an IC for IRS purposes and no federal income taxes need be withheld, you won’t need to withhold state income taxes, either. A list of state income tax offices follows. State Tax Offices Alabama Department of RevenueMontgomery, AL334-242-2677www.ador.state.al.us Alaska Department of RevenueJuneau, AK 99802-5509907-465-2300www.revenue.state
Chapter 7: Workers’ Compensation This chapter provides an overview of the workers’ compensation system. It also explains when you need to provide workers’ compensation insurance for workers and what happens if you don’t. A. Basics of the Workers’ Compensation System Each state has its own workers’ compensation system that is designed to provide replacement income and medical expenses for employees who suffer work-related injuries or illnesses. Benefits may also extend to the survivors of workers who are killed on the job. To pay for this, employers in all but two states—New Jersey and Texas, where workers’ compensation is optional—are required to pay for workers’ compensation insurance for their employees, either though a state fund or a private insurance company. Employees do not pay for workers’ compensation insurance. Before the first workers’ compensation laws were adopted about 80 years ago, an employee injured on the job had only one recourse: sue the employer in court for neglig
Chapter 7: Workers’ Compensation
B. Injured ICs’ Rights to Sue YouAn IC who is not covered by workers’ compensation can sue you for damages for personal injuries if your negligence—that is, carelessness or failure to take proper safety precautions—caused or contributed to the injury. You will also be held responsible for the negligence of your employees. EXAMPLE: Trish, a self-employed trucker, contracts to haul produce for the Acme Produce Company. Trish is an IC, and Acme does not provide her with workers’ compensation insurance. Trish loses her little finger when an Acme employee negligently drops a load of asparagus on her hand. Since Trish is an IC, she can’t collect workers’ compensation benefits from Acme’s insurer, but she can sue Acme in court for negligence. If she can prove Acme was negligent, Trish can collect damages not only for her lost wages and medical expenses, but for her pain and suffering as well. These damages could far exceed the modest sums that workers’ compensation benefits would have provid
C. The Need for Liability InsuranceNo matter how small your business, if you hire ICs, it is vital that you obtain general liability insurance to protect yourself against personal injury claims by people who are not your employees. A general liability insurer will defend you in court if an IC, customer or any other nonemployee claims you caused or helped cause an injury. The insurer will also pay out damages or settlements up to the policy limits. Such insurance can be cheaper and easier to obtain than workers’ compensation coverage for employees, so you can still save on insurance premiums by hiring ICs rather than employees. If you don’t have general liability insurance already, contact an insurance broker or agent to obtain a policy.
D. Requiring ICs to Obtain Their Own Coverage Many hiring firms require workers classified as ICs to obtain workers’ compensation coverage for themselves. Such coverage is available in most states, even if an IC is running a one-person business. If you don’t do this, your own workers’ compensation insurer might require you to cover the IC and pay additional premiums. Insurance companies do this because there is a risk that an injured IC might later claim to be an employee just to get workers’ compensation benefits. Your workers’ compensation insurer will audit your payroll and other employment records at least once a year to make sure you’re paying the proper premiums. If you require an IC to be insured, obtain a certificate of insurance from the worker. A certificate of insurance is issued by the workers’ compensation insurer and is written proof that the IC has a workers’ compensation policy. Keep it in your files and make it available to your workers’ compensation insurer when you’r
E. Providing Coverage for IC EmployeesIn all states except Alabama, California, Delaware, Iowa, Maine, Rhode Island and West Virginia, you might have to provide workers’ compensation benefits for the employees of ICs—depending on the circumstances. Under state laws that define statutory employees, an IC’s uninsured employees are considered to be your employees for workers’ compensation purposes if: the IC fails to obtain workers’ compensation insurance for them, and the IC’s employees perform work that is part of your regular business—that is, work customarily carried out in your business and other similar businesses. The purpose of these laws is to prevent employers from avoiding paying for workers’ compensation insurance by subcontracting work out to uninsured ICs. EXAMPLE: The Diamond Development Company, a residential real estate developer, is building a housing subdivision. It hires Tom, a painting subcontractor, to paint the houses. Tom is an IC who has sole control over the pai
F. Determining Who Must Be CoveredYou must use a two-step analysis to determine whether you must provide a worker with workers’ compensation insurance. First, determine if workers’ compensation coverage is necessary if the worker is qualified as an employee under your state workers’ compensation law. Most states exclude certain types of workers from workers’ compensation coverage. (See Section G.) You won’t have to provide coverage for workers who fall within these exclusions. Some states also don’t require coverage unless you have a minimum number of employees. Second, if there is no exclusion for the workers involved, you must determine whether the workers should be classified as employees or ICs under your state’s workers’ compensation law. If they’re employees, you’ll have to provide coverage; if they’re ICs, you won’t. States use different tests to classify workers for workers’ compensation purposes. (See Section H.)
G. Exclusions From CoverageMost states exclude certain types of workers from workers’ compensation coverage. The nature and scope of these exclusions vary somewhat from state to state. Check the workers’ compensation law of your state—or ask your workers’ compensation carrier to do so—to see how these exclusions operate in your state. 1. States With Employee Minimums The workers’ compensation laws of several states exclude employers having fewer than a designated number of employees. In other words, if you have fewer than this minimum number of employees, you don’t need to obtain workers’ compensation insurance for anyone—employees or ICs. State Requirements for Workers’ Compensation Coverage State Employees Required Alabama five or more Arkansas three or more Florida four or more (one or more for construction trades) Georgia three or more Michigan three or more Mississippi five or more Missouri five or more New Mexico three or more Rhode Island four or more South Carolina four or more
H. Classifying Workers for Workers’ Compensation Purposes If none of the exclusions discussed above applies, you must determine whether a worker is an employee or IC under your state’s workers’ compensation law. If the worker qualifies as an employee, you must provide workers’ compensation coverage. (Remember: Even if you know what a worker’s classification is under the IRS rules and under your state’s unemployment laws, you must still check your state’s workers’ compensation rules, because a worker may be an IC under some rules but an employee under others.) Each state has its own workers’ compensation law with its own definition of who is an employee. However, these state laws follow one of three patterns. Most states classify workers for workers’ compensation purposes using the common law right of control test. (See Section 1.) Other states use a relative nature of the work test, either alone or in conjunction with the common law test. (See Section 2.) A few states use different cla
I. Obtaining CoverageSome states allow an employer to self-insure—a process that typically requires the business to maintain a hefty cash reserve earmarked for workers’ compensation claims. Usually, this isn’t practical for small businesses. Most small businesses buy insurance through a state fund or from a private insurance carrier. If private insurance is an option in your state, discuss it with an insurance agent or broker who handles the basic insurance for your business. Often you save money on premiums by coordinating workers’ compensation coverage with property damage and public liability insurance. A good agent or broker may be able to explain the mechanics of a state fund where that’s an option or is required. Note For detailed guidance on workers’ compensation insurance audits, see Comp Control: The Secrets of Reducing Workers’ Compensation Costs, by Edward J. Priz (Oasis Press), and Slash Your Workers’ Comp Costs: How to Cut Premiums Up to 35%—And Maintain a Productive and
J. State Workers’ Compensation OfficesA list of state Workers’ Compensation Offices follows. State Workers’ Compensation Offices Alabama Workers’ Compensation DivisionDepartment of Industrial RelationsMontgomery, AL334-242-2868http://dir.state.al.us/wc Alaska Workers’ Compensation DivisionDepartment of LaborJuneau, AK907-465-2970www.labor.state.ak.us/wc/wc.htm Arizona Industrial CommissionPhoenix, AZ602-542-4661www.ica.state.az.us Arkansas Workers’ Compensation CommissionLittle Rock, AR501-682-3930www.awcc.state.ar.us California Division of Workers’ CompensationSacramento, CA800-736-7401www.dir.ca.gov/dwc/dwc_home_page.htm Colorado Division of Workers’ CompensationDenver, CO800-390-7936 or 303-318-8700www.coworkforce.com/DWC Connecticut Workers’ Compensation CommissionHartford, CT860-493-1500www.ctdol.state.ct.us Delaware Division of Industrial AffairsOffice of Workers’ CompensationWilmington, DE302-761-8200www.delawareworks.com/divisions/industaffairs/workers.comp.htm District of Colu
Chapter 8: Hiring Household Workers and Family Members This chapter provides guidance if you have hired, or intend to hire, a person to work in or around your home—or if you hire a parent, spouse or child to work at any location. It explains a host of rules that often make life a little easier for people who hire these types of workers. A. Household Workers Household workers include housecleaners, cooks, chauffeurs, housekeepers, nannies, babysitters, gardeners, private nurses, health aides, caretakers and others who work in the home. 1. Federal Payroll Tax Status Federal payroll taxes include Social Security tax (FICA), federal unemployment taxes (FUTA) and federal income tax withholding (FITW). You don’t have to pay or withhold any federal payroll taxes for household workers who are ICs. FICA and FUTA must be paid for employee household workers whose salaries exceed certain amounts. (See Section A2.) You need to apply the IRS test discussed in Chapter 4 to determine if a household wo
Chapter 8: Hiring Household Workers and Family Members
B. Family Members As WorkersFamily members work with and for each other all of the time. If a family member is an IC under the tests discussed in this book, then that’s great—you don’t have to worry about such things as payroll taxes and unemployment compensation (depending on the test, of course). And even if the family member is your employee under these tests, you may still escape payroll taxes under special state rules. In Section 1, below, we discuss federal rules. In Section 2, below, we discuss state rules. 1. Federal Payroll Taxes To determine if a family member is an IC for IRS purposes, follow the same steps that we describe in Chapter 4. If the family member is an IC, then you can stop there. If the family member is an employee, however, you may still escape federal payroll taxes (FICA and FUTA). Read on. a. Children employed by parents A parent need not pay FUTA taxes for services performed by a child who is younger than 21 years old. This is so regardless of the type of wo
Chapter 9: Labor and Anti-Discrimination Laws Overview Employees enjoy a wide array of rights under federal labor and anti-discrimination laws. Among other things, these laws: impose minimum wage and overtime pay requirements on employers make it illegal for employers to discriminate against employees on the basis of race, color, religion, gender or national origin protect employees who wish to unionize, and make it unlawful for employers to knowingly hire illegal aliens. Most states have similar laws protecting employees. In recent years, a growing number of employees have brought lawsuits against employers alleging violations of these laws. Some employers have had to pay hefty damages to their employees. In addition, various watchdog agencies, such as the U.S. Department of Labor and the U.S. Equal Employment Opportunity Commission, have authority to take administrative or court action against employers who violate these laws. One of the advantages of hiring ICs is that few of these
Chapter 9: Labor and Anti-Discrimination Laws
A. Federal Wage and Hour Laws Most businesses are covered by the FLSA, but not all workers are included in its coverage. ICs are not subject to this law. Nor are employees who fall within any of the several exempt categories discussed below. Caution Don’t Forget State Laws This discussion only pertains to the federal wage and hour law. It does not address state laws, with which you must also comply. Contact your state labor department for more information. (See Section F of this chapter for contact information.) 1. When the FLSA May Apply You are required to pay employees working for you either the federal minimum wage ($5.15 per hour) or, if your state has a higher minimum wage, you are required to pay that wage. One possible exception is for household workers. (See Chapter 8 for guidance on hiring household workers.) The reason you need to be concerned about the FLSA is because of overtime pay requirements. The FLSA requires that all non-exempt employees be paid an additional one-ha
B. Federal Labor Relations Laws The National Labor Relations Act or NLRA (29 U.S.C. §§ 151 and following) gives most employees the right to unionize. This enables them to negotiate collective employment contracts through union representatives rather than having to deal with employers individually. The National Labor Relations Board (NLRB) administers the law and interprets its provisions. The NLRB conducts union elections and enforces the NLRA’s rules of conduct, determining whether employers have engaged in unfair labor practices. 1. Only Employees Covered The NLRA applies only to employees. ICs have the right to form a union if they wish to do so, but they are not protected by the NLRA. You can decline to use the services of ICs who form a union or simply express support for a union. You can’t do this with employees who are covered by the NLRA. 2. Employees Exempt From the NLRA Not all private sector employees are covered by the NLRA. Exempt employees include: managers and supervisor
C. Anti-Discrimination Laws The federal government and most states have laws prohibiting discrimination in the workplace. Most of these laws apply only to employees, not ICs. 1. Federal Anti-Discrimination Laws The main federal law barring workplace discrimination is Title VII of the federal Civil Rights Act of 1964. Title VII applies to businesses that have 15 or more full-time or part-time employees. It outlaws discrimination in employment based on race, color, religion, gender or national origin. Sexual harassment in the workplace is also prohibited as a variety of illegal gender discrimination. Other federal laws barring workplace discrimination include: the Age Discrimination in Employment Act, which prohibits discrimination in employment on account of age against people who are 40 or more years old and applies to employers with 20 or more employees the Pregnancy Discrimination Act, which bars employers from discriminating against employees on account of pregnancy, birth or relate
D. Worker Safety Laws The federal Occupational Safety and Health Act or OSHA (29 U.S.C. §§ 651 to 678) requires employers to keep their workplaces safe and free from recognized hazards that are likely to cause death or serious harm to employees. Employers must also provide safety training to employees, inform them about hazardous chemicals, notify government administrators about serious workplace accidents and keep detailed safety records. OSHA applies to businesses that affect interstate commerce. The legal definition of interstate commerce is so broad that almost all businesses are covered. OSHA is enforced by the federal Occupational Safety and Health Administration, or OSHA, a unit of the Department of Labor. OSHA can impose heavy penalties for legal violations and set additional workplace standards. 1. OSHA Coverage of ICs OSA applies only to employees, not to ICs. OSHA uses the economic reality test to determine if workers are employees or ICs. (See Section A, above, for an in-de
E. Immigration Laws Some workers in the United States are immigrants. And some of these immigrants work illegally—that is, they are not U.S. citizens and don’t have a green card or other documentation of their legal status. All employers must verify that their employees are either U.S. citizens or nationals, or legal aliens authorized to work in the U.S. You are not required to verify citizenship when you hire an IC. The government uses the common law right of control test to determine whether a worker is an employee or IC for immigration purposes. (See Chapter 3 for an in-depth discussion of the common law test.) In addition, the verification requirements do not apply to any employees hired before November 7, 1986. However, although you are not required to verify the immigration status of ICs or others coming within these exceptions, it is still illegal for you to hire any worker whom you know to be an illegal alien. The federal government can impose a fine up to $2,000 for the first
F. Labor Departments U.S. Department of Labor200 Constitution Avenue, NWWashington, DC 20210202-219-6666www.dol.gov Check government pages of the telephone book for your regional office. State Labor Departments Note: Phone numbers are for department headquarters. Check websites for regional office locations and numbers. Alabama Department of Industrial RelationsMontgomery, AL334-242-8990 www.dir.state.al.us Alaska Department of Labor and Workforce DevelopmentJuneau, AK907-465-2700 www.labor.state.ak.us Arizona Industrial CommissionPhoenix, AZ602-542-4411www.ica.state.az.us Arkansas Department of LaborLittle Rock, AR501-682-4500www.state.ar.us/labor California Department of Industrial RelationsSan Francisco, CA415-703-5070 www.dir.ca.gov Colorado Department of Labor and EmploymentDenver, CO303-318-8000 cdle.state.co.us Connecticut Department of LaborWethersfield, CT860-263-6000 www.ctdol.state.ct.us Delaware Department of LaborWilmington, DE302-761-8000 www.delawareworks.com/DeptLabor D
F. Labor Departments
Chapter 10: Intellectual Property Ownership This chapter explains the rights and responsibilities of those who hire ICs to help create intellectual property. This includes not only high technology companies and publishers, but any company that has information it wants to keep from its competitors. A. What Is Intellectual Property? Intellectual property is a generic term describing products of the human intellect that have economic value. It includes works of authorship such as writings, films and music, inventions and information or know-how not generally known. Intellectual property is considered property because the law gives the owners of such works legal rights similar to the rights of owners of real estate or tangible personal property such as automobiles. Intellectual property may be owned and bought and sold the same as other personal property. Despite these similarities, there are some significant ways in which owning intellectual property is quite different from owning a house
Chapter 10: Intellectual Property Ownership
B. Laws Protecting Intellectual PropertyThere are three separate bodies of law that protect most types of intellectual property: copyright, patent and trade secret law. 1. Copyright Law The federal copyright law (17 U.S.C. §§ 101 and following) protects all original works of authorship. A work of authorship is any work created by a human being that other humans can understand or perceive, either by themselves or with the help of a machine such as a film projector or television. This includes, but is not limited to, all kinds of written works, plays, music, artwork, graphics, photos, films and videos, computer software, architectural blueprints and designs, choreography and pantomimes. The copyright law gives the owner of a copyright a bundle of exclusive rights over how the work may be used. These include the exclusive right to copy and distribute the protected work, to create derivative works based upon it—updated editions of a book, for example—and to display and perform it. Copyrigh
C. Copyright OwnershipA work of authorship is automatically protected by copyright the moment it is created. At that same moment, someone becomes the owner of the copyright. If you pay an IC to create a copyrightable work on your behalf, you normally want to be the copyright owner. That will give you the exclusive right to copy, distribute and otherwise economically exploit the work. Without these rights, your ability to use the work will be very limited, even though you paid for it. There are two ownership possibilities. Either: the work will be a work made for hire, in which case you will automatically be the copyright owner, or the work will not be a work made for hire, in which case the IC will initially own the copyright and you will have no ownership rights unless you specifically obtain them from the IC. 1. Works Made for Hire When you pay someone to create a work made for hire, you automatically own all the copyright rights in the work. Indeed, you are considered to be the work
D. Trade Secret and Patent OwnershipThe rules for determining ownership of trade secrets and patentable inventions by ICs are essentially the same. 1. Inventions and Trade Secrets Created by Workers Whenever you hire any worker to create or contribute to the creation of a patentable invention or information or know-how you wish to maintain as a trade secret, it’s vital that the worker sign an agreement transferring his or her ownership rights to your company. This is so whether the worker is an employee or IC. Such an intellectual property ownership transfer is called an assignment. It should be in writing and signed before work begins. It is common practice among high-technology firms and other businesses that create patentable inventions or valuable trade secrets to have creative workers sign such assignments. (See Chapter 13 for information about creating an assignment.) In the absence of a signed assignment, you can still obtain ownership of any inventions or trade secrets an IC cr
Chapter 11: Planning to Avoid Trouble This chapter explains how, with careful planning, you can hire outside workers and lessen your chances of being audited. If you do get audited, these methods will lessen your chances of losing the audit. These methods have been known to legal and employment professionals for years. But you don’t have to hire a highly paid expert to use them. A. Hiring Incorporated Independent Contractors The single most effective thing you can do to avoid IRS and other government audits is to hire ICs who have formed corporations, rather than those who operate as sole proprietors or partnerships. To understand why this is so, you need to know a little about the various legal forms a business can take. ICs can legally operate their businesses as: sole proprietors partnerships limited liability companies, or corporations. Find out which category ICs fall into before hiring them, since it could affect the outcome of an IRS or other government audit. Caution There Is
Chapter 11: Planning to Avoid Trouble
B. Employee LeasingInstead of hiring workers directly, many companies lease or rent them from outside leasing companies. Such workers may be referred to as temporary employees, temps, contract employees or contingent or casual workers. This chapter refers to them as leased employees. Using leased employees is sometimes referred to as outsourcing or outside staffing. Whatever the practice is called, leasing employees has become an increasingly popular method for hiring firms to obtain the services of outside workers. Worker leasing arrangements take a variety of forms. For example, you may lease workers from an employment agency that locates the workers for you or already has them on staff. This is what temporary agencies do. In other cases, the leasing company may hire your employees and lease them back to you for a fee. Employee leasing can give you many of the benefits that can be obtained by hiring ICs directly. You use them only when needed and then dispense with their services wit
Chapter 12: Procedures for Hiring Independent Contractors If you hire ICs, you must assume that, sooner or later, the IRS and other government agencies will audit you and that they will question the status of workers you’ve classified as ICs. Long before you’re audited, you should have in your files all the information and documentation you need to prove that a worker is an IC. Don’t wait until you’re audited to start thinking about how to prove a worker is an IC; by then it may be too late. A. Before Hiring an IC Someone in your company should be in charge of: interviewing prospective ICs determining whether applicants qualify as ICs authorizing workers to be hired as ICs, and preparing an IC data file containing the information and documentation you’ll need to prove the worker is an IC if you’re audited. This individual, who may be called a Contract Administrator, should be fully trained regarding the laws and rules used to determine a worker’s status. If you’re running a one-person
Chapter 12: Procedures for Hiring Independent Contractors
B. During the IC’s Work PeriodTreat the worker as an IC while he or she works for you—much the way you would the accountant who does your company’s taxes or the lawyer who handles your legal work. There are a number of work habits you must avoid: Don’t supervise the IC or his or her assistants. The IC should perform the services without your direction. Your control should be limited to accepting or rejecting the final results the IC achieves. Don’t let the IC work at your offices unless the nature of the services absolutely requires it—for example, where a computer consultant must work on your computers or a carpet installer is hired to lay carpet in your office. Don’t give the IC employee handbooks or company policy manuals. If you need to provide ICs with orientation materials or suggestions, copies of governmental rules and regulations or similar items, put them all in a separate folder titled Orientation Materials for Independent Contractors or Suggestions for Independent Contracto
C. After the IC’s Services EndA hiring firm’s work is never done. Even after an IC’s services end, there is paperwork to complete. Failing to do so may mean severe penalties if you’re audited. 1. IRS Form 1099 The single most important thing to do after an unincorporated IC’s services end is to provide the worker and IRS with an IRS Form 1099-MISC reporting the compensation you paid the worker. Your failure to do so will result in severe penalties if the IRS later audits you and determines you misclassified the worker: you’ll be required to pay the IRS twice as much for the misclassification. you’ll lose the right to Safe Harbor protection for any payments not reported on Form 1099; this means you’ll lose one of your most valuable legal rights in defending against the IRS. the IRS may impose a $100 fine for each Form 1099 you failed to file. a. When Form 1099 must be filed The basic rule is that you must file a Form 1099 whenever you pay an unincorporated IC—that is, an IC who is a sol
Chapter 13: Independent Contractor Agreements Overview This chapter explains why you should use written agreements with independent contractors, describes what such agreements should contain and provides sample language for you to use. There are a number of ways you can use the suggested text offered here. You can draft contracts using the files contained on the CD-ROM. Using the suggested language from the CD gives you the greatest flexibility, as you will be able to pick and choose the clauses that apply to your situation. You can then use your final draft as a starting point of negotiations with the IC and tailor your final agreement to both of your needs. If you do not have access to a computer, you can retype the language suggested in this chapter to assemble your final agreement. Again, this will allow you to tailor your document to your specific needs. You can complete and use the tear-out sample forms in Appendix 3. While this may be the easiest option available to you, it is t
Chapter 13: Independent Contractor Agreements
A. Using Written AgreementsSign a written agreement with an IC before he or she starts work. An IC agreement serves two main purposes: it avoids later disputes by providing a written description of the services the IC is supposed to perform and how much the IC will be paid, and it describes the relationship between you and the IC to help make clear that the IC is not your employee. 1. Oral Agreements Courts are crowded with lawsuits filed by people who entered into oral agreements with one another and later disagreed over what was said. Costly misunderstandings can develop if an IC performs services for you without a writing clearly stating what he or she is supposed to do and what will happen if it isn’t done. Such misunderstandings may be innocent; you and the IC may have simply misinterpreted one another. Or they may be purposeful; without a writing to contradict him or her, an IC can claim that you orally agreed to anything. Some Agreements Must Be in Writing Some types of agreemen
B. Drafting AgreementsYou don’t need to hire a lawyer to draft an independent contractor agreement. All you need is a brain and a little common sense. This chapter gives you guidance and suggested language to use as a starting point in fashioning your agreement to meet your needs. 1. Standard Form Agreements There are various standard form IC agreements you can obtain from stationery stores and other sources. These forms contain standard one-size-fits-all legalese and are not tailored for any particular occupation. IRS and state auditors are well aware that hiring firms often have workers sign such generic IC agreements before they start work. The worker may not even bother to read the agreement and certainly makes no changes in it to reflect the real work situation. The more an IC agreement is custom-tailored for each worker or group of workers performing similar tasks and reflects the true relationship between the hiring firm and workers, the more helpful it will be. 2. The Drafting
C. Essential ProvisionsA number of provisions should be included in most IC agreements. All of these sample clauses are included in the Independent Contractor Agreement. (See Section E for a sample of how an entire agreement might look when assembled.) The entire text of the following agreement is on the CD-ROM in the back of this book under filename GENAGREE. This information can be used as: a checklist when you review an IC agreement provided by a worker to make sure nothing important has been left out, or a starting point to draft your own agreement. These provisions may be all you need for a simple IC agreement. Or you may need to combine them with some of your own clauses or one or more of the optional clauses discussed here. (See Section D.) Title of agreement. Deceptively simple things such as what you call an IC agreement and yourself and the IC can have a big impact. You need not have a title for an IC agreement, but if you want one, call it Independent Contractor Agreement or
D. Optional ProvisionsThe following provisions are not absolutely necessary to include in every IC agreement, but you may want to include one or more in your agreement depending on the circumstances. 1. Modifying the Agreement No contract is engraved in stone. You and the IC can always modify or amend your contract if circumstances change. You can even agree to call the whole thing off and cancel your agreement. EXAMPLE: Barbara, an IC well digger, agrees to dig a 50-foot-deep well on property owned by Kate for $2,000. After digging ten feet, Barbara hits solid rock that no one knew was there. To complete the well, she’ll have to lease expensive heavy equipment. To defray the added expense, she asks Kate to pay her $4,000 instead of $2,000 for the work. Kate agrees. Barbara and Kate have amended their original agreement. Neither you nor the IC is ever obligated to accept a proposed modification to your contract. Either of you can always say no and accept the consequences, which at its
E. Sample IC AgreementCD-ROM/Document The text of an Independent Contractor Agreement is on the CD-ROM under filename GENAGREE. You can also find a copy in Appendix 3. Note that the provisions in the sample agreement below are numbered to coincide with the discussion in Section C. You should be able to craft some form of this agreement to meet your needs if you hire any type of general independent contractor. Independent Contractor Agreement This Agreement is made between Acme Widget Co. (Client) with a principal place of business at 123 Main Street, Marred Vista, CA 90000, and ABC Consulting, Inc. (Contractor), with a principal place of business at 456 Grub Street, Santa Longo, CA 90001. 1. Term of Agreement This Agreement will become effective on May 1, 20XX, and will end no later than June 1, 20XX. 2. Services to Be Performed Contractor agrees to perform the following services: Install and test Client’s DX9-105 widget manufacturing press so that it performs according to the manufac
F. Agreements for Specialized ICs This book provides five IC agreements that are tailored for specific types of service providers, including: household workers (see Section F1) direct sellers (see Section F2) real estate salespersons (see Section F3) independent consultants (see Section F4), and contributors to a work made for hire (see Section F5). 1. Household Workers CD-ROM/Document The text of a Household Worker Agreement is on the CD-ROM under filename HOUSEH. You can also find it in Appendix 3. Household workers are people who perform services in and around your home such as gardeners, housekeepers, cooks and nannies. Part-time gardeners, housecleaners and similar workers can be ICs if they are running their own businesses. However, it’s unlikely that a nanny or other in-home child care worker could qualify as an IC. The agreement on the CD-ROM is tailored to use with those household workers who qualify as ICs. This agreement is as simple and short as possible. It contains a ser
Chapter 14: Help Beyond This Book The legal issues involved in hiring ICs are complex and varied. You may have questions that aren’t answered by this book. This chapter provides guidance on how to find and use more specific legal resources including lawyers and other knowledgeable experts. It also explains the basics of doing your own legal research. A. Finding and Using a Lawyer An experienced attorney may help answer your questions and allay your fears about working with independent contractors. 1. What Type of Lawyer Do You Need? Many different areas of law are involved when you hire ICs, including: federal tax law state tax law workers’ compensation law federal and state employment and anti-discrimination laws, and general business law. Unfortunately, you may find it difficult or impossible to find a single attorney to competently advise you about all these legal issues. For example, an attorney who knows the fine points of tax law may know nothing about your state’s workers’ compe
Chapter 14: Help Beyond This Book
B. Help From Other ExpertsLawyers aren’t the only ones who can help you deal with the legal issues involved in hiring ICs. Tax professionals, insurance brokers and trade groups can also be very helpful. 1. Tax Professionals Attorneys are usually the most expensive, but not always the most knowledgeable, professionals you can go to for advice on tax law. You can get outstanding tax advice at lower cost from many non-attorney tax professionals such as enrolled agents and certified public accountants. These tax professionals can help you research IRS rulings and answer other tax-related questions. a. Enrolled agents Enrolled agents are tax advisors and preparers licensed by the IRS. They earn the designation of enrolled agent by either passing a difficult IRS test or working for the IRS for at least five years. An enrolled agent is generally the least expensive of the tax pros and is very adequate for most small business tax advice and reporting. b. Accountants Certified public accountant
C. Doing Your Own Legal ResearchIf you decide to investigate the law on your own, your first step should be to obtain a good guide to help you understand legal citations, use the law library and understand what you find there. There are a number of sources that provide a good introduction to legal research, including Legal Research: How to Find & Understand the Law, by attorneys Stephen Elias and Susan Levinkind (Nolo). This nontechnical book simply explains how to use all major legal research tools and helps you frame your research questions. Next, you need to find a law library that’s open to the public. Your county should have a public law library, often at the county courthouse. Public law schools often contain especially good collections and generally permit the public to use their libraries. Some private law schools grant access to their libraries—sometimes for a modest fee. The reference department of a major public or university library may have a fairly decent legal research c
Chapter 4: Federal Taxes and the IRS Rules
Chapter 5: IRS Audits
Chapter 6: State Payroll Taxes
Chapter 7: Workers’ Compensation
Chapter 8: Hiring Household Workers and Family Members
Chapter 3: The Common Law Test
Chapter 4: Federal Taxes and the IRS Rules
Chapter 5: IRS Audits
Chapter 6: State Payroll Taxes
Chapter 8: Hiring Household Workers and Family Members
Chapter 9: Labor and Anti-Discrimination Laws
Chapter 10: Intellectual Property Ownership
Chapter 11: Planning to Avoid Trouble
Chapter 12: Procedures for Hiring Independent Contractors
Chapter 13: Independent Contractor Agreements
Chapter 14: Help Beyond This Book
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