Small business owners often try to save money – especially in the early going – by using independent contractors instead of hiring full-time employees.  Using independent contractors, or “contract workers” means the business does not have to withhold taxes, pay Social Security or Medicare or meet numerous other employer responsibilities.

Many such arrangements, however, may come under IRS scrutiny.  And the strategy can backfire if someone later claims they should really have been treated, and paid, as an employee.

Deciding who can legitimately work as an independent contractor and who must be an employee has become a difficult matter for small business owners. You cannot just choose what is best for you, as the business owner.

Remember independent contractors work for themselves.  They operate their own business.  You are their client, not their employer.  In the contract, you define the end product, but you do not dictate their hours or control their work.  In the eyes of the IRS and other government agencies, a worker is an employee unless you can prove otherwise.

Based on the expected results defined in the contract, contractors control when and where they work.  Also independent contractors do not usually have a permanent or continuing relationship with your business.  Plan to compensate independent contractor on a per-job basis, not weekly or monthly.

Since contractors are paid to complete a specific task, they may hire others to help, at their discretion and on their payroll, and they should use their own equipment and technology.

Contractors cannot be fired as long as they produce the results specified in their contract.

Always require an invoice that documents the task completed before making payment.

When hiring an independent contractor, ensure you obtain an IRS Form W-9 which contains, among other things, the contractor’s tax identification number (TIN).  Any payments in excess of $600 per year you make to an independent contractor must be documented and reported on the IRS Form 1099 Miscellaneous with a copy provided to the independent contractor.

Before you agree to an independent contractor relationship, make sure you understand what that means and carefully weigh the pros and cons.  Getting sound advice on the use of independent contractors is vital to your business.  If you need such advice, you may wish to discuss the matter with your accountant or contact us at East Carolina SCORE at 252-974-1848 or via email at ec@scorevolunteer.org.

SCORE is a national, nonprofit organization that offers confidential and free counseling to small businesses. In the greater Washington area, contact SCORE by leaving a phone message at 252-974-1848, by visiting the website at www.EastCarolina.Score.org or visiting the office on Tuesday and Thursday mornings in the JobLink building, 1385 John Small Ave., Washington.

Bob Schultz  is a local SCORE counselor.