Figurines Shaking Hands to Show an AgreementOne of the biggest decisions you'll make running your business in Minnesota will be whether it's time to hire employees or independent contractors. There can be a variety of times when you confront this question. When they are starting out, many businesses can’t afford to take on a lot of overhead. One of the primary sources of overhead is employees, which often causes founders or solo owners to spend most of their time doing all of the jobs at the business. But as the business continues to grow, what do you do when you aren't able to literally do everything that is required? When it comes time to expand, should you hire an employee or an independent contractor?

One of your primary concerns will be the tax treatment of the person you hire to assist you with your business. Depending on which way you fall on the employee v. independent contractor spectrum will determine if you need an agreement or not.

What Type of Person am I Hiring for Tax Purposes?

You don't hear the IRS being praised very often, however, they do have a very user-friendly section of their website for looking at whether a person who is working for you is considered an employee or contractor (“Independent Contractor (Self-Employed) or Employee”).

The IRS breaks down the possible business relationships into five common categories:

  • An independent contractor
  • An employee (common-law employee)
  • A statutory employee
  • A statutory nonemployee
  • A government worker

Chances are, the person you are hiring falls into one of these categories. If they don’t, or you are still unsure, you can file a Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding).

This choice is yet another reminder of the importance of working with professionals. An accountant can assist you with these filings because if you don’t classify the person correctly, you can have a large tax bill coming your way.

What is an Independent Contractor Agreement?

If you’ve determined that you are hiring a person who will be an independent contractor, it’s a good idea to have an agreement drawn up that memorializes your working relationship. The agreement should lay out what the person will be doing, how they will be paid, and how the taxes for their employment will be dealt with. There will also be a variety of other provisions, including a provision that specifically says that they are an independent contractor, not an employee.

Each independent contractor agreement is different and unique. If the contractor you are working with has been in business for themselves for a while, they may even have a proposed contract or scope of work for you to review. But be careful, don’t just grab a blank agreement from some website and try to use it. I was once reviewing documents for a client who pulled it from a website in Texas, but the client was in New York. The agreement was full of language about Texas law, and nothing about New York. So it is important to pay attention to what you are putting together.

These agreements don't need to be long and complicated, but they need to be done correctly. You don't want to accidentally create a huge tax liability for your business because you tried to save a few dollars by using some form you found on a website. While you are creating the agreement, you'll also want to make sure you are checking in with your accountant to ensure the tax treatment is correct as well.

Next Steps

If you are thinking of starting a business or already started your business and want to discuss if an independent contractor agreement would be helpful, let's set up a Legal Strategy Session to discuss the process and how to best tailor an agreement for your company.

Andrew Ayers
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I work with business and estate planning clients to craft legal solutions to protect their legacies.
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