In today’s competitive business world, many businesses are cutting expenses and saving money on payroll taxes by using independent contractors. Small businesses can be competitive and even experience growth by using contractors and keeping prices in check, however, there are criteria to consider before going this route. Be advised that the government isn’t a fan of losing employment taxes, so it is extremely important to follow the rules or find ways to work around them.
Independent contractors have a place in most companies.
When your company requires assistance from workers who can perform their duties on their own schedule without outside aid, independent contractors make the most sense. If the duty must be performed at a mandated time and in a specific place, the worker will be considered an employee by the Employment Development Department (EDD).
That is one of the first criterion the governments looks for during audits. Independent contractors must be able to perform the task at hand “independently” and without assistance from other staff members who might be on salary.
A word to the wise: Never have employees perform the same duties as contractors. The different compensation structures alone will be a red flag.
Make sure independent contractors have their own equipment.
Most small business owners think that throwing a contractor out there to perform a task is all you really need to worry about, but that is not the case. Independent contractors must have their own equipment and must lease or purchase any supplies to perform their duties. As an owner, you can’t just give them equipment or supplies or else they are technically not functioning alone. Setting up equipment leases or requiring them to buy equipment are the two most common ways to handle this EDD criterion.
Uniforms can also be tricky, but most businesses using contractors can get away with requiring uniforms as long as it is a client preference, visibility issue or even a safety concern. If it is important for your company’s branding and cohesiveness to mandate that contractors use uniforms, then make sure the contractors understand that clients demand it in order for them to feel comfortable working with an ‘outside’ professional.
Charge them a small marketing fee.
Most businesses using contractors spend money marketing their services and use hourly or salaried employees to accomplish this task. Charging your contractors a small marketing fee will legitimize this support and keep this arm of the business well within the range of compliance.
Allow for refusal of work.
You might need contractors to start at 8 a.m. but never demand that they do. Those who do make it in early will get work and those who do not, will not get any work. In fact, if you wish to create a schedule, then get all contractors to provide their availability then use it to “record” the individually created schedules. If any contractors change their availability they can turn away the work without obvious repercussion, however, if they refuse any work you can refuse to use them again. Make sure they understand how this works beforehand.
Pay them by job, not by the hour and pay them fairly
Be very careful about paying hourly for their services. Set lump sum payments for each individual job and your better contractors will simply make more money and accomplish the work faster. Make sure the demands of each “call of duty” are spelled out and adhered to or work will become shabby. Eliminate contractors who cut corners to get more work or clients and your business will suffer.
Save money on taxes, but don’t aim to make more money on their efforts. Keep the savings in perspective and try not to pay less for their efforts by switching over from employee to contractor.
NOTE: Take the time to study your state’s laws carefully and eliminate all reasons to be audited. Most states are looking for extra revenue, so the more you play by the rules the more likely you will sleep easy at night if an audit does occur.