Do Your Independent Contractors Pass the Test?

Running a small business often means being president, CEO, receptionist and cleaning crew. But sometimes you need extra hands. Many businesses hire independent contractors, but before you do, take into consideration whether those helpers meet the legal definition of being independent.

Hiring independent contractors has many advantages over employees, such as avoiding the headaches and costs related to worker's compensation insurance, benefits, unemployment compensation, and overtime. But government agencies are scrutinizing whether people actually fall within the strict guidelines for being an independent contractor, particularly if that individual should get hurt on the job or file an unemployment claim.

In NH, misclassifying workers is one of the 10 most common workplace labor violations. The IRS increased payroll audits of random small businesses, and many state agencies continue to crack down on employers who erroneously classify an individual as an independent contractor to avoid payroll taxes, unemployment and worker's compensation insurance. New Hampshire's definition of an independent contractor is far more restrictive than the federal government's. You must meet all 12 criteria in the state's worker's compensation and unemployment compensation laws to be considered an independent contractor:

1.  The independent contractor must possesses a federal employer identification number or social security number.

2.  The independent contractor has control and discretion over how the work is performed; the contract is for the result of that work.

3.  The independent contractor has control over the time when the work is performed. This means work times are not being dictated, except for completion dates, a range of work hours or maximum number of work hours to be provided, and in the case of entertainment, the time such entertainment is to be presented.

4.  The independent contractor hires and pays his or her own assistants, if any, and to the extent such assistants are employees of the independent contractor, supervises the details of the assistants' work.

5.  The independent contractor holds him or herself out to be in business for his or herself.

6.  The independent contractor has continuing or recurring business liabilities or obligations.

7.  The success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures. Essentially, this means there needs to be a risk of loss, and that it's legitimately possible to have expenses that exceed income.

8.  The independent contractor receives compensation for work or services performed and the hiring party does not determine compensation alone. In other words, the parties are able to negotiate a fee for the services performed.

9.  The independent contractor is responsible for the main expenses related to the service or work performed. However, this does not prohibit the hiring party from providing the supplies or materials necessary to perform the work.

10. The independent contractor is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work.

11. The independent contractor supplies the principal tools and means used in the work, except that the hiring party may furnish the tools or means that are unique to the hiring party's special requirements or are located on the hiring party's premises.

12. The independent contractor is not required to work exclusively for the hiring party.

These rules have been in effect since Jan. 1, 2008. Four state agencies coordinate efforts to enforce laws that require most workers to be classified as employees and not as independent contractors. They are: The Division of Employment Security, the Department of Labor, the Department of Insurance, and the Department of Revenue Administration. The state has a web site-www.nh.gov/nhworkers-that invites reports of alleged misclassifications.

Steven A. Feinberg is CPA of Appletree Business Services LLC in Londonderry and specializes in small business matters, including tax and payroll issues. For additional information, visit his blog at blog.appletreebusiness.com, e-mail info at appletreebusiness dot com, or call 603-434-2775.