The Wealth Spa

How do you keep your contractors from becoming employees?

Posted on 01. Aug, 2007 by Elizabeth Potts Weinstein in Legal

I advocate using independent contractors, such as Virtual Assistants, as a way to grow your business without increasing overhead and regulatory issues.  But the only way for this strategy to work is for you to be actually hiring independent contractors, and not accidentally letting the relationship morph into an employee relationship.   If the person is actually an employee, you must be paying social security taxes, FICA, unemployment, and withholding income taxes on them — and you are personally liable for those payroll taxes if you are wrong (even if you are incorporated). 

How do you keep this from happening? 

The IRS applies a three factor test to determine whether a person who is working with you is an independent contractor, or an employee.

Behavioral Control:  To keep someone as an independent contractor, you must focus on the results, not how the person is performing the tasks.  Do not direct the person how, when or where to do the work, and do not provide or decide which tools to use.  Contractors also can usually hire other people to do the work, and buy their own supplies (even if they do charge you for the use of certain supplies, like sending faxes).   Independent contractors are not trained by you — they provide their own training to get the job done.

Financial Control:  This factor is about who has the risk.  If you are paying someone by the hour, for a set number of hours each week, it is much more likely they are an employee than if you are paying them a per project fee, where they are not going to get paid unless they finish the project.  Contractors typically have invested money in their own business, and can make more or less money depending upon how well they do.  For example, if you pay someone $1000 to design a logo for you, it may take them 2 hour or 20 hours — and if they work for 2 hours they make a big profit, and if they work 20 hours they incur a loss. 

Relationship of the Parties:  Contractors typically have a contract (hence the term "contractor") that governs the relationship between the two of you.  Also, if a business pays benefits to the person, like a retirement plan or health insurance, then the person is probably an employee. 

The general rule is that you want to be hiring a business, not a person — even if that business is, in reality, just one person.  The contractor should have other clients, and be holding themselves out to the public as a business — if you are giving your VA a ton of work, you should hire a new VA before your current VA starts actually working for you (because they don’t have time to take on other clients).  You should be dictating the results of each project, now how the person gets it done.   You can say that you want them to create a jpg file for you, but not which software program they use to create that file, for example. 

If you don’t want to deal with it, then consider actually hiring a company.  My VA is an independent contractor for a VA placement company that I hired to provide VA’s for me.  Makes it easy and simple for me, and less worries. 

Still not sure?   Leave a comment and I will answer your questions in a future post! 

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Tags: Govt Rules & Regulations