Independent contractors are persons who contract to perform services for others. Generally, when hiring an employee, in addition to salaries, you must pay employee expenses such as payroll taxes, Social Security tax, workers' compensation insurance premiums, and employee benefits. In addition to the paperwork and accounting headaches, these expenses often add up to an additional 20%-30% on top of payroll costs. Thus an employee earning an annual salary of $50,000 actually can cost $60,000 to $65,000. None of these costs are applicable in an IC relationship.

"... when hiring an employee, in addition to salaries, you must pay employee expenses such as payroll taxes, Social Security tax, workers' compensation insurance premiums, and employee benefits... an additional 20%-30% on top of payroll costs. None of these costs are applicable in an IC relationship."

Additionally, hiring ICs greatly diminishes your vulnerability to some types of lawsuits including job discrimination, wrongful termination and workers' compensation. Furthermore, since the IC relationship is a contract for a specific task or tasks, generally an IC cannot quit the project midway without incurring liability for the unfinished work.

Since the IC relationship is a contractual one, you can be quite creative and flexible in the formation of the contract. For example, payment structure can be based on a time line, calendar, or upon successful completion of specific tasks. You can even contract to only pay upon successful completion of the entire project.

Finally, persons holding themselves out as ICs generally are skilled industry. They must be, in order to survive tough job markets and be able to acquire work. Hiring skilled help saves you a great deal of time and money in on the job training.

The most common pitfall in hiring ICs is misclassification. Should you misclassify a legal employee as an IC, the IRS may require you to pay not only all back taxes owed with interest, but may impose additional penalties of 12% - 35% of the total tax bill. Furthermore, as in any situation where fraud may be at issue, the IRS may press criminal charges against company officials. In addition to IRS audits, many states conduct their own. State audits, often prompted by ICs who apply for unemployment compensation after their services are terminated are actually more common than IRS audits. As a result of an unemployment investigation, the state may pursue an audit of your employment practices. Finally, once all the agencies have collected their due as a result of the misclassification, the IC may sue for unemployment insurance, stock options and all other benefits, overtime, profit sharing, disability payments, workers' compensation and more.

Legally, while ICs cannot file for worker's compensation, they are able to file suit for negligence if injured on the job. This is something regular employees covered by workers' compensation cannot do.

As previously mentioned, ICs contract to perform services. Therefor the relationship between you and the IC is not employee-to-employer but rather a professional-to-client. The IRS has developed a set of guidelines to determine whether a worker may be classified an IC. Generally speaking, the first and foremost question lies in the employer's right to direct and control the work being done: if the employer is able to exert control and direct the work, the worker is an employee. If on the other hand, the worker is simply contracted to complete a task or tasks and the "employer" is limited to accepting or rejecting the final results, then that worker is an IC.

The following is a list of factors used by the IRS to determine IC/employee classification. worker...

• Can the worker be told where to work by the hiring firm?
• Does the worker furnish his or her own tools to perform the task?
• Does the worker receive instructions from the hiring authority?
• Is the worker told of the sequence or order to work the task to completion?
• Does the worker receive training or guidance from the hiring authority?
• Does the worker set his or her own hours?
• Does the worker provide progress reports to the hiring authority?

• Does the worker earn a profit or suffer a loss from the activity?
• Can the worker be paid by the task or only by hour?
• Does the worker invests in his or her own equipment and facilities?
• Does the worker pay his or her own travel and other expenses

• Does the worker offer his or her services to the general public?
• Can the worker work for more than one firm at a time?
• Is the worker able to hire and pay assistants?

• Can the worker be fired by the hiring authority?
• Does the worker have a continuing relationship with the hiring authority?
• Does the worker have the right to quit without incurring further liability?
• Does the worker perform the services personally?
• Does the worker work full time for the hiring authority?
• Does the worker provide services that are an integral part of the hiring authority's day-to-day operations?

Not all of these factors are deemed equally important by the IRS and therefore an IC relationship missing a few factors may still be considered as correctly classified. Moreover, there are numerous agencies concerned with proper classifications for various reasons. These include IRS, State Unemployment Compensation Insurance agencies, State Workers' Compensation Insurance agencies, State Tax departments, the US Labor Department and the National Labor Relations Board. Since each agency has its own reasons for concern, the criteria utilized may differ slightly and while one agency may deem the relationship properly classified, another may not. However, the one common thread is based on control: if the hiring authority is able to control and direct the work being done, the relationship is that of employer/employee not IC. In sum, the IC must possess the power to decide when, where and how the tasks are completed.

We have already covered the contractual nature of the IC relationship and as you know, it is best to get every contract in writing. So what should you include in your IC contract? To save yourself the headache down the line, at minimum describe in detail the scope of services to be performed, the associated due dates and the compensation structure. The written agreement, although not final proof of IC status, can help demonstrate to the IRS or other agency the parties' intent to create an IC relationship. Remember, as with any contract, the IC contract is only useful if followed to the letter: do not treat an IC like an employee if you want to maintain the contract.

As a hospitality manager you may or may not be using ICs at your workplace. If not, we urge you to reconsider: in a tight market this may grant you an excellent business opportunity. Although misclassifications can occur, they can easily be prevented with the appropriate steps taken. Should you need specific consultation on the IC laws of your state, the costs of a simple consultation with an attorney are greatly outweighed by the cost and time savings of using ICs in the long run. If you have not yet pursued this business opportunity, we welcome you to inquire further.