4. Individual on the job: A contractor may hire a substitute without the company\u2019s permission \u2013 although the company should then be able to terminate the contract with the contractor if the substitute is not acceptable.<\/p>\n 5. Term:\u00a0 A contractor is hired for a specific project, usually tied to a time term. An undefined period of time favors the ruling as employee.<\/p>\n 6. Reporting: Here is a surprise. The IRS wants to test that a contractor is NOT required to submit regular reports.\u00a0 Yet, most of us would want to have such documentation of progress other than an invoice.<\/p>\n 7. Tools and materials: The contractor must supply his or her own tools.\u00a0 This is tricky when a contractor sits at your desk using your computer and your phone system all day.<\/p>\n 8. Physical facility: The contractor must have its own \u201chome office\u201d even if in a bedroom, from which primary work is performed.<\/p>\n 9. Works for more than one company:\u00a0 If such a person works only for a single company for any period of time, that person will probably be determined to be an employee.\u00a0 A contractor must make services available to the general public.<\/p>\n 10. Termination: A contractor works under a contract \u2013 which means that an independent contractor cannot be \u201cfired,\u201d as long as results are satisfactory as defined within the contract of service.<\/p>\n There are more tests, but these are the ones most often used by the IRS.\u00a0 States add a few of their own; so beware.\u00a0\u00a0 Pay contractors using account payable systems, not payroll services.\u00a0 Pay only upon receipt of invoices, not with regularly triggered checks or transfers of uniform amounts without invoice documents to back up the payments.<\/p>\n Many small or early stage company CEOs look for opportunities to cut cash drains, knowing that payroll is usually the greatest cash drain of all. The temptation to reduce that by fourteen percent or more by classifying a gray area employee as a contractor is very high.\u00a0 And that includes self-payments to a founder.<\/p>\n Founders working for a company are employees if they take regular payments, subscribe to company benefits, attend regular company meetings, or fail any of the tests above.\u00a0 The temptation to just draw cash and call it a loan, or document a year\u2019s withdrawals with a 1099 is great, but highly risky.<\/p>\n There is nothing worse than a large tax bill and threats of a government agency seizing a cash account when a company cannot or does not respond with proper documentation or payment.\u00a0 And even a single year\u2019s worth of transgressions, when added into a single tax bill with penalties and interest, can appear daunting to small and young companies.<\/p>\n Like payment of payroll taxes by incremental impound each pay period, as opposed to waiting until the last minute and making manual tax payments, it is a proper discipline of management to \u201ctake the hit\u201d incrementally to protect the business from a catastrophic failure to pay a governmental agency any form of tax when and as due.\u00a0\u00a0 Need we emphasize the personal liability of management AND the board of directors attached to tax payments?<\/p>\n Good management takes discipline and enough knowledge to prevent these possibly crippling errors in judgment that stem from decisions made to avoid or put off tax payments when accrued or due.<\/p>\n","protected":false},"excerpt":{"rendered":" How many of us have \u201chired\u201d independent contractors over the years, a bit worried over the gray area between employee and contractor as defined by the IRS?\u00a0 I\u2019ve experienced the results of a wrong decision, and the IRS and state … Continue reading ![\"Three_Berkonomics_Fronts_black\"](\"https:\/\/berkonomics.com\/wp-content\/uploads\/2012\/10\/Three_Berkonomics_Fronts_black.jpg\")
<\/a>3. Integration: A contractor provides services which are not an integral part of the core business of the employer.\u00a0 This one is tricky. \u00a0Is a contracted CFO an employee because the CFO job is integral?\u00a0\u00a0 How about a contractor CEO?\u00a0\u00a0 The person must pass all the other tests when one of them, such as this, crossed into the very gray zone.<\/p>\n