The
Independent Contractor Report |
Q. What is an
independent contractor?
A. It's a person or other entity rendering services
who is not your employee. As a general rule, an independent contractor
receives an IRS Form 1099-MISC at the end of the year. An employee
receives IRS Form W-2.
Q. What is an independent contractor (IC)
agreement?
A. It's a written agreement between a firm
using ICs (payer-firm) and the IC (payee-worker).
Q. Do I need an IC agreement?
A. Yes, if you use ICs regularly in the
usual course of your business operations.
Q. Why do I need an IC agreement?
A. Without an IC agreement in writing, there
is only an oral or verbal agreement between the payer-firm and the payee-worker. When the
unexpected happens (i.e., IRS or State employment tax audit, workers' compensation audit
or legal dispute with the worker), with no written agreement there is a high probability
that the worker will give a version of the "understanding" that is at odds with
the payer-firm's version. Moreover, on audit, a well drafted IC agreement is strong
evidence for the payer-firm -- it can make the difference between winning and loosing an
audit.
Q. Do I need an IC agreement every
time I use a non-employee or IC?
A. No. Here are several examples.
- Your business uses an accounting firm to perform accounting services
- Your business uses a law firm to perform legal services
- Your widget sales firm hires a properly licensed plumber once or twice a year to fix leaks in office bathroom plumbing
- NOTE: In each of these examples there is little or no chance that a State or Federal (IRS) auditor might try to reclassify the worker (CPA, lawyer, plumber) from IC to employee. It's obvious to anyone that such workers are engaged in their own independent businesses.
