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Be wary of independent contractors
There’s a great deal to be said for hiring people as “independent contractors.” ICs, they’re often called. And most of the advantage have to do with savings – the desire on the part of the person or company hiring the ICs to cut costs. But those savings, if any exist at all, come with rules that can be quite restrictive.
What kinds of savings? Well, right off the bat, there’s the 7.65% that might be saved by not having to pay Social Security and Medicare taxes for an IC. And there’s also the possible savings from not having to pay state unemployment compensation insurance or workers’ comp insurance. And since an IC is not an “employee” as such, the person or company he or she works for is usually not considered liable for the acts -- committed or omitted – of an IC.
Because of those rules I mentioned earlier about the use of ICs, those savings come with a price. One disadvantage of hiring ICs is that you can’t impose start-work and stop-work times. They’re virtually free to come and go as they please, as long as they perform the work you and they have agreed to.
As for when they are on the job, by law you have far less control over how and what an IC does compared to the control you would have over an employee.
You may also be liable for the injuries an IC suffers while doing work for you. The fact of the matter is that there are well over 20 rules or requirements that must be adhered to by those who hire ICs. Not the least of your concern is the likelihood of federal or state audits of your business if you’re ever suspected of misclassifying a person suspected of being an employee instead of an IC.
I know of a painting contractor who hired nothing but people he considered ICs to work for him. The problem he ran into was that his customers wanted to know when his painters would arrive and when they’d be finished with whatever was being painted. As a result, the painting contractor began telling the ICs when they had to be where, and when they had to be finished.
The state audit some three years into his painting business, considered each of his eight ICs to be employees. As a result, instead of keeping the $6,800 or so he’d saved, he ended up having to pay a fine more than 10 times that.
If you’re considering using ICs for any reason, check with your attorney first – the one on your Professional Support Team -- to be sure you structure the arrangements correctly. What Professional Support Team? That attorney, accountant, banker and insurance broker you established relationships with even before you finished your written business plan..
What written business plan? All I can tell you is that lacking those two key ingredients, you’ve got more serious things to think about than whether or not to hire independent contractors.
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