More home businesses get in trouble with the Internal Revenue Service for miss-classifying their workers than for any other reason. Typically the outside help works in the studio on a full- or part-time basis using the business owner’s tools and equipment, and is paid an hourly wage with no deductions taken. When the IRS discovers this (and they will find out!) the so-called contract worker is reclassified as an employee, federal employment taxes are imputed (social security, Medicare and unemployment), interest and penalties are accessed, and the business owner discovers that the effective rate being paid the newly-promoted employee is double what he thought.
How can you make yourself bulletproof to an IRS challenge of contract worker status? It is worth reading the IRS publication itself if you have any question at all, but here are a few common sense criteria:
- A contract worker usually performs his work outside your studio
- He is not supervised
- He sets his own hours of work
- He has other customers for whom he does contract work
- He bills you for services rendered
- He uses his own tools and equipment
- You issue him a Form 1099 miscellaneous income statement at year-end and file it with the IRS
I’m not saying that the contract worker has to either work outside your studio or use his own tools and equipment in every case, but such conduct constitutes a red flag. If you have any questions regarding the status of your worker(s), I suggest that you talk it over with your accountant.
Here’s the “official” position of the IRS: “Generally, the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished.” Is that clear?