Hiring an independent contractor, rather than putting another employee on payroll, can often save you quite a bit of money. This is because you do not have to pay for unemployment insurance, workers compensation, sick leave or health insurance for independent contractors as you would for your employees.
Working with independent contractors can also decrease your exposure to potential lawsuits. While an independent contractor could potentially sue you for an injury suffered on the job, he or she cannot sue you for job discrimination, wrongful termination, etc.
An employer’s greatest concern in hiring independent contractors is misclassifying an actual employee as an independent contractor. Because you must pay social security as well as federal and state taxes on behalf of your employees, you may want to classify them as independent contractors, but this can get you in trouble.
You are, however, required to report to the Internal Revenue Service (IRS) any payments made to independent contractors for services rendered to your business that are more than $600 by filling out a 1099-MISC form.
If you do in fact misclassify an employee as an independent contractor, you will likely be responsible for any unpaid taxes that you would have paid had you correctly classified that person as an employee. The IRS will also charge you a penalty, which can range anywhere from 12% to 35% on top of the taxes owed.
In addition to any penalties imposed by the IRS, you may be liable to a number of different state agencies for inaccurate classification. If, for example, an employee that you had deemed an independent contractor applies for unemployment, you may be liable to the state unemployment agency.
An business attorney with experience in tax and employment transactions will be able to make sure that you classify your employees properly and protect you from having to pay steep penalties to the IRS. He or she can also represent you in the event that you are sued by an employee or independent contractor.