How to Toe the Line When Hiring Independent Contractors and Reap Big Dividends

All you’re required to do is inform the IRS if you paid this worker more than $600 in one year.

The phrase Toe the Line is an Americanism first recorded in the early nineteenth century. The main meaning of this phrase is ‘to conform strictly to a rule, command, etc… For example, “Anyone who doesn’t toe the line can expect to meet the mayor in court, where, as it turns out, he has never lost a suit.” (U.S. News & World Report, 1996).


An Independent Contractor is a person hired to work for others without having the legal status of an employee.

Hiring someone who qualifies as an Independent Contractor can provide an employer with some very BIG dividends…

Dividend #1: You don’t have to pay the employers share of the workers Social Security and Medicare taxes.

Dividend #2: You don’t have to withhold income taxes (federal or state) on his/her earnings.

Dividend #3: Not only do you reduce your bookkeeping and financial obligations, you’re not bound by many of the federal and state laws that normally govern the employer – employee relationship.

Dividend #4: You don’t have to provide office or other work space for the worker.

Dividend #5: You don’t have to provide fringe benefits (vacation, personal or sick time).

Dividend #6: You don’t have to provide health insurance or retirement benefits.

Dividend #7: If you become unhappy with the person’s work, you can fire him/her without going through the trauma often associated with firing an employee. Plus you don’t get stuck paying unemployment benefits.

All you’re required to do is inform the IRS if you paid this worker more than $600 in one year.

You’re responsible for filing a Form 1099-MISC at the end of the year …

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Labor – Overtime and Independent Contractors

Employers often hire workers and categorize them as independent contractors to avoid paying overtime, taxes, and complying with other federal and state labor and employment related laws. In overtime cases the courts and the administrative agencies do not automatically accept the idea that a worker is not entitled to overtime rights by simply categorizing the worker as an independent contractor. The workers are more often than not still employees and can file overtime claims.

The test to determine if a worker is an independent contractor is based primarily on the principal’s right to direct and control the manner and means by which the work is performed. It does not mean the employer has to exercise these rights. If the principal has the right to control then the worker will be an employee, even if the employer never actually exercises the control. When the principal does not have the right of direction and control over the worker, then the worker is independent contractor. The question in most cases is what does the right to control mean.

1. Do you instruct or supervise the worker while the worker is working ?

Independent contractors are free to jobs in any way they see fit. It is the end result that matters for independent contractors. If there are company procedures or if the worker is given specific instructions on how to do the work, then chances are that the worker is an employee.

2. Can you fire the worker at any time or can the worker quit at any time without notice ?

If you have the right to fire the worker without notice, it strongly shows that you have the right to control the worker. Independent contractors are hired for specific jobs and cannot be fired until the job is complete. Independent contractors …

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Independent Contractors Or 1099 Employees – The Risks

The Independent Contractor status of workers is being seriously challenged by the IRS. Between 1988 and 1992 the IRS reclassified more than 400,000 Independent Contractors to employees and collected over $ 52.5 Million ($ 52,500,000) in back taxes. In 1992 alone the IRS conducted 1,700 audits of businesses, reclassified 90,000 workers and collected $ 19 Million ($ 19,000,000) in tax assessments. (Statistics from US Chamber of Commerce, 1993). If you are a businessman who utilizes Independent Contractors during the year, your business could be in jeopardy. Do not be lulled into a false sense of security by the IRS's October 25, 1995 announcement that "Due to federal spending cutbacks, we will discontinue our long time practice of random tax return audits."

Our subject here is NOT about "random audits." It's about a specific, identifiable targeted group. These audits have been very profitable to the US Treasury. It's a hot issue and not about to be forgotten or relegated to the back burner any time soon. Stay awake on this one, folks! This article is not intended to be a negative shot at the IRS, but rather a warning to business owners who hire "Independent Contractors." Be Aware and Be Prepared! Failure to do so could cost you a lot of money, a lot of grief, and possibly even your business.

Most business people want to play by the rules. But, WHAT ARE THE RULES in this game? If a worker is classified as an "Independent Contractor", the business which hires him must file a Form 1099 with the IRS whenever the gross compensation for that person exceeds $ 600 in a calendar year. The Independent Contractor is then required to pay his own income taxes, Social Security taxes (called self-employment tax), Medicare, Unemployment taxes and worker's compensation insurance premiums. Oh, …

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What Nonprofit Organizations Need to Know About Hiring Independent Contractors

Most well informed nonprofit managers know they need various insurance policies to protect themselves and their organization from a variety of lawsuits and claims. Some of the most common policies nonprofit's purchase are general liability insurance, directors & officers liability, and workers' compensation insurance. Yet many fail to realize how these do and do not apply to independent contractors.

General Liability Insurance
Nonprofit and for-profit businesses alike often view insurance through the lens of protecting their employees and their assets. However, failing to address the limitations of insurance in regards to independent contractors can leave gaping holes in an organization's overall protection. For example, if an employee accidentally injures someone or does damage to someone's property while performing his or her job, that organization's general liability policy would respond to any resulting claim or lawsuit.

Most, if not all, general liability policies exclude coverage for independent contractors. If the contractor causes injury or damage, the nonprofit's insurance company will likely deny the claim. That is why it is vital to discuss policy exclusions as well as risk management with your broker to avoid coverage gaps.

From a cost standpoint, hiring contractors has advantages. These advantages include less payroll taxes, less workers compensation premium, and less expensive employee benefits. However, the savings may not adequately offset the increased risk to the organization.

Workers' Compensation Insurance
If an independent contractor meets the state and federal definitions then it is not a requirement to include them in the payroll reported to your workers comp company. As a result, many organizations try to declare various employees as contractors. This move can save an organization money on workers' comp, however, in the final audit (performed annually on all workers comp policies) it may be determined that these workers do not meet the established guidelines. As …

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Stiff New Penalties for Misclassification of Independent Contractors

There has been a trend in recent years for companies to treat workers as independent contractors in order to avoid the administrative responsibilities and extra costs applicable to employees (payroll taxes, workers' compensation insurance, unemployment insurance, overtime pay, and various employee benefits). In response, both the Internal Revenue Service and state agencies have stepped up compliance audits to check whether businesses are properly classifying their workers. An employer who has made incorrect classifications faces an array of governmental fines and penalties, as well as liability to the misclassified workers.

California has raised the stakes with a new law, effective January 1, 2012, which adds Sections 226.8 and 2753 to the Labor Code. Section 226.8 prohibits any person or employer from willfully misclassifying an individual as an independent contractor, or from making any charges or compensation deductions (eg, for goods, materials, or space rental) to such individual if it would be unlawful to make such charges or deductions to an employee. Section 226.8 imposes penalties of $ 5,000 to $ 25,000 for each violation.

The law does not specify how often a "violation" is deemed to occur, leaving open the possibility that multiple penalties could be assessed with regard to a single worker. A willful misclassification is defined as one that is "voluntary and knowing." It is not clear how this standard will be interpreted by the courts.

Section 226.8 also requires any employer found to have violated the law to display prominently on its website for one year a specified notice relating to the violation.

Violations of the law by licensed contractors will be reported to the Contractors' State License Board, which will initiate disciplinary action against the contractor.

Under Section 2753, a person who, for money or other valuable consideration, knowingly advises an employer to treat an individual as …

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