The question of whether a business needs an independent contractor agreement commonly arises in my meetings with small business owners. 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. I’ve found it pretty common for the owner to be the one doing most (if not all) of the work when the company first gets up and running.
But what happens a few months down the road? The business is growing, and the owner can’t do everything. 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.
What Type of Person am I Hiring for Tax Purposes?
The IRS has a very user-friendly section of its website for this purpose. Check out their “Independent Contractor (Self-Employed) or Employee” page for more information.
The IRS breaks down the 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). 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 that. 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 they are an independent contractor, not an employee.
Each independent contractor agreement is different and unique. Don’t just grab a blank one from some website and try to use it. I was once reviewing one 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 pay attention to what you are putting together.
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, give me a call and we can sit down to discuss the process and how to best tailor an agreement for your company – (877) AMAYERS.
