When I started my company in 2006, my intent was to have only independent contractors for the first five years, with the goal of minimizing overhead. My plan was to re-evaluate growth, goals, expenses and income in 2011 to determine whether I should start hiring employees.
However, as with most small businesses, there’s always something that doesn’t go according to plan — at all.
This was one of those things.
At the conclusion of a long-term project with one of my customers, an independent contractor who had been providing on-site support for the project filed for unemployment benefits. What the what? I was left with that perplexed “Scooby Doo” look on my face.
How can my former independent contractor file for unemployment when our duly signed, attorney-approved agreement clearly states “independent contractor”? When I received a notice from the Maryland Department of Labor, Licensing and Regulation, I thought it would be resolved quickly once I sent them the signed agreement.
Well, it wasn’t. My next notice included a case number for an audit of the work and compensation history not just for that individual, but for my records on every person I had hired in the three years leading up to that.
During the audit, DLLR officials reviewed my payroll information and compared workers to see if those who had been doing similar work were identifying it the same way on their income tax returns. They also wanted to know whether each contractor had an online presence (they asked me for Web site addresses) and whether each individual had been doing work on-site for my company in Maryland.
Not only did they determine that one past contractor was an employee, they also designated three others as employees. As a result, I had to pay thousands of dollars in employment taxes for those individuals for that entire time frame, even though some of them weren’t even on my payroll at the time of the audit.
I thought I had done my due diligence to develop an understanding of what constitutes an employee versus an independent contractor. Ultimately, though, reading through the Internal Revenue Service’s checklist and trying to sort through my state’s guidelines on my own didn’t prove sufficient.
So, if you’re structuring a company like mine and you aren’t sure, call the IRS and talk it through. Explain the type of work an individual will be doing and ask for some guidance.
After going through this, I’ve done consulting work for my clients to help them make better hiring decisions. For instance, I had a customer who was offering their independent contractors full benefits, and another whose contractors were working on-site and had no other customers they were claiming work for on their taxes. I’ve been able to guide them in the right direction and help them avoid potential audits.
So, make sure you are identifying and verifying these details with your contractors:
Does your contractor do similar work for others and identify that on their tax forms?
Does the contractor have a Web site?
Has the contractor provided you with a complete W-9 tax form?
Are you giving the contractor control to handle tasks with little direction from you?
If you are unsure about any of these items, I suggest you seriously consider making the individual an employee — or at the very least, pick up the phone and seek some guidance.
Tya Bolton is the chief executive of Exceptional Business Solutions, a business and event management agency in Columbia