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I was wondering if anyone knows in what cases a company needs to take withholdings out of an Independent Contractor`s (IC) wages?
Also, I am concerned that in the future the IRS might try to dub an IC an employee. How can I make sure an IC is really an IC? Do they need to be set up as a business? Can I pay them by the hour?
Any suggestions will be greatly appreciated.
Thank you,
Eric
I`m not a tax person either, but we ran a business once where others in the same business (sales agents for a large office equipment company) tried to pay their sales people as contractors and got smacked by the IRS. There are some VERY specific rules that must be carefully followed. We also looked at a lawsuit against this company ourselves because while they considered us to be independent contractors, they were violating quite a few of the IRS rules in that they were attempting to exert direct control over our business activities (such as how many sales people we HAD to have) and control the hours we worked and how we ran our business.
I`m with Craig, I`m sure the tax people will weigh in. But, I just know enough to know that you need to be very careful because if you get caught in that trap, you will lose your shirt.
~Kim
Here is a page on the IRS website that might help.
http://www.irs.gov/businesses/small/article/0,,id=99921,00.h tml
Janet
Tread very carefully here, read the IRS definitions of an IC vs an Employee. Also review your state law, Unemployment taxes usually take IC compensation into the calculation. Either entity can shut your business down for falling afoul of their laws.
I was going to suggest the website that Janet provided a link to. Also make sure your IC Contract spells out specific duties and responsibilities of the Contractor.
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