Where would I be able to find a sample independent contractor agreement?

I would like my employees to work as independent contractors. Where would I be able to find a sample independent contractor agreement?

 

Answer: Converting workers you have treated as employees to independent contractor status is particularly risky when the workers will hold the same jobs as contractors as they did when they were classified as employees. Often such conversions will trigger IRS scrutiny and an employment tax audit. Therefore, employers generally do not change a worker treated as an employee to independent contractor status unless the worker’s job responsibilities and structure have changed in a manner that qualifies the worker’s position for contractor status.

 

Assuming your workers are properly classified as employees, without modifying their jobs and the degree of control you exercise over their activities you may risk exposing your business to significant employment tax, labor law and workers’ compensation liabilities by converting them to contractors. Therefore, before converting any workers classified as employees to independent contractor status, you should clarify that their jobs and the control you exert over how they perform their jobs would qualify them as independent contractors under IRS rules.

 

If you are uncertain about the proper classification of workers you engage, you should review the details of their responsibilities with your lawyer to assure that you handle their compensation, payroll taxes, and insurance in accordance with labor and tax regulations. For discussion with your lawyer, the following are some of the considerations when engaging workers as independent contractors.

 

Independent contractor status: Independent contractors pay their own payroll taxes and insurances, including workers’ compensation and are not covered by many labor laws, so the financial and administrative benefits of having a workforce composed of independent contractors can be significant. However, it is crucial for business owners to understand that independent contractor status is not an arbitrary election but is based on the job structure. It is also important to understand that independent contractor status cannot be established or supported by the completion of any particular forms or tax paperwork (like Form 1099-MISC), the drafting of a carefully worded offer letter or an independent contractor agreement, a piece work, commission, or other performance-based compensation method, or by part-time, seasonal or other short-term work arrangements.

 

Misclassifying workers as contractors can have labor law, employee benefits, employment tax and workers’ compensation implications for businesses and the affected workers. For example, making the wrong determination of a worker’s status can result in IRS and state tax audits with back tax assessments that can be ruinous to a small business; therefore, it is important that a business owner understand the criteria that the IRS and state authorities use in determining whether a worker is properly classified as an employee or an independent contractor.

 

Whether a particular worker qualifies as an independent contractor with regard to the services provided your business will depend on all the facts and circumstances. An independent contractor is a legal category of worker defined by the Internal Revenue Service. The basic difference between an independent contractor and an employee under the IRS definition is that, unlike employees, independent contractors retain control over how the work they are hired to do gets done; the person or company paying the independent contractor controls only the outcome – the product or service. With an employee, by contrast, the person or company paying an employee controls not only the outcome of the employee’s work but also how the work they do gets done. In order to determine whether a worker qualifies as an independent contractor rather than an employee, the worker’s job and the control you exert over the worker must be evaluated under what is known as the common law right of control test. Under this subjective test, for which the IRS developed a 20-factor analysis for its auditors, the IRS basically takes the position that if you tell a worker what to do and how to do it, then that worker is an employee. Since the potential penalties for misclassifying a worker as a contractor rather than an employee can be severe, you should clarify that a worker’s job meets the IRS criteria for independent contractor status before engaging the worker.

 

 You can also review more in depth discussions at the following IRS websites:

• 2013 Employer’s Supplemental Tax Guide: irs.gov (see 2. Employee or Independent Contractor?)
• Independent Contractor or Employee: irs.gov

Contractor tax reporting.

 

Form 1099-MISC. Under current tax law, businesses report cash and check payments for services rendered by non-corporate vendors, such as qualified independent contractors, on Form 1099-MISC, which is filed annually and, in the case of services, only when payments total $600 or more during the calendar year. Businesses are required to provide non-corporate vendors with copies of Form 1099-MISC for the preceding calendar year by January 31st. Copies of Forms 1099-MISC also must be submitted to the IRS and certain state taxing authorities for the preceding calendar year by February 28th; however, most states obtain their 1099 information through data sharing arrangements with the IRS. Forms 1099-MISC submitted to the IRS must be accompanied by Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Forms 1099-MISC and 1096 must be submitted to the IRS electronically or using machine readable (optically scanned) forms that you can order directly from the IRS at 1-800-TAX-FORM (1-800-829-3676). You can find and review Forms 1099-MISC, 1096 and the filing instructions at the following IRS websites:

• Form 1099-Miscellaneous Income: irs.gov
• 2013 Annual Summary and Transmittal of US Information Returns: irs.gov

Form 1099-K: It is important to note that beginning with the 2011 tax year, businesses only report cash or check payments on Form 1099-MISC. Payments made by credit or debit cards as well as those made through third-party networks such as PayPal, Amazon and Google are reported by the payment processors on new Form 1099-K. You can review the changes at IRS.gov:

• 1099-K Reporting Requirements for Payment Settlement Entities: irs.gov
• Form 1099-K Payment Card and Third Party Network Transactions: irs.gov

However, the regulations contain an “aggregate payee” rule that requires companies who accept credit or debit card payments and third party network payments for other parties who work for them as independent contractors to report those payments on Form 1099-K. You can review Form 1099-K and its instructions at the following websites:

• 2013 Form 1099-K Payment Card and Third Party Network Transactions: irs.gov
• 2013 Instructions for Form 1099-K: irs.gov

Form W-9: The basic tool to properly identify and manage your Form 1099 reporting and potential tax withholding obligations with vendors is Federal Form W-9, Request for Taxpayer Identification Number and Certification. Form W-9 is used by businesses to obtain a vendor’s, including an independent contractor’s, TIN or Taxpayer Identification Number (Social Security Numbers in the case of an individual or Federal Employer Identification Number or EIN for a business) and to have the vendor certify that they are not subject to backup withholding. When a vendor fails to provide you with a TIN, you will be required to withhold federal income tax from your payments to that vendor under the backup withholding rules. For 2013 the backup withholding rate is 28%. You can locate Form W-9 and instructions and review the backup withholding rules at the following IRS websites:

 

Form W-9:

• Form W-9 Request for Taxpayer Identification Number and Certification: irs.gov
• Instructions for the Requester of Form W-9: irs.gov

Backup withholding:

• Backup Withholding: irs.gov
• Backup Withholding “B” Processes: irs.gov

Contractor agreements: Regardless of the business structure, it is advisable to have written agreements with qualified independent contractors to explain the job responsibilities, compensation arrangements, tax and insurance responsibilities, and other important terms of the arrangement. Businesses typically have insurance provisions in written independent contractor agreements that explain the required insurance coverage (liability, workers’ compensation, bond, etc) and that require contractors to provide a Proof of Insurance Form that demonstrates that they have the insurance required under the contract. In addition, it is advisable for businesses that use independent contractors to obtain the proper liability insurance coverage to protect themselves from the actions of contractors who fail to maintain the required insurance or are otherwise named in legal actions involving their contractors. You should consult your business insurance agent to determine the recommended insurance coverage and other risk management implications when engaging independent contractors.

 

As to confidentiality and non-disclosure, non-solicitation and non-compete provisions, it is fairly common for independent contractor agreements to incorporate confidentiality and non-disclosure and non-solicitation provisions; however, non-compete provisions or separate agreements with independent contractors are a different legal issue. While it is possible to have a form of non-compete agreement with independent contractors in some situations, you will want to review these situations and agreements with your lawyer to insure that you do not jeopardize their contractor status. As a general rule, they can be enforceable under the proper circumstances, but the enforceability of a non-compete agreement depends on the language of the agreement and the circumstances in which the agreement was executed. The factual circumstances of every case are different and require independent analysis to determine the enforceability of such agreements.