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| Hire Independent Contractors, Not Employees Many LLC’s, large and small, use independent contractors rather than employees for some jobs. They can provide flexibility, cut costs and reduce paperwork. However, if you’re not careful how you use independent contractors, you may have a tax problem with the IRS, State unemployment authorities, Department of Labor, Wage and Hour Division or State Workers Compensation officials. Independent contractors may not have to be included in fringe benefit coverage, including vacations, holidays, sick days, 401(k) plans, funeral leave or retirement plans. But the big advantage in using them is in the area of payroll taxes. For employees, you must withhold part of each paycheck, match the withheld portion and send both sides to the IRS. There’s also the accounting time and costs involved. For independent contractors, compensation is simpler: You give one check to the worker. At the end of each year, you send information reports (IRS Form 1099) to the worker and to the IRS. The IRS, however, prefers that you classify workers as employees rather than independent contractors because the IRS would rather have payroll taxes come in automatically and on time. Therefore, if there’s any doubt at all, the IRS will likely re-classify independent contractors as employees. If your LLC or Corporation has been paying workers as independent contractors, and the IRS, State unemployment compensation officials, Department of Labor, Wage and Hour Division or State Workers Compensation officials claim that they’re really employees, you will probably owe back employment taxes, unemployment taxes, interest and penalties for not paying taxes timely and for not withholding taxes and also face the possibility of tax liens and be personally liable and responsible for any worker’s injury while working for your corporation or LLC. How can you avoid the problem of classification of an independent contractor as an employee? First and foremost, have the independent contractor form their own corporation or LLC. Be sure your company only pays the independent contractors corporation or LLC for services rendered. Next, use a written Independent Contractors Agreement and be sure your independent contractor’s company and your company sign the agreement. If you follow the above procedure, your “independent contractor” will never be classified as your employee. | |