Just be aware that you'll need a concrete policy for managers to steer clear of the IRS and legal headaches in hiring outside workers.
Show me the money — Financial pros of using contractors
As a U.S. Chamber of Commerce study showed that for each full-time employee's salary, a company on average pays:
- 12.4 percent in Social Security, workers' comp, unemployment and disability insurance
- 12.4 percent in vacation time, sick leave and lunch and work breaks
- 15.5 percent in pensions, health insurance and other benefits.
In addition, federal statutes such as Title VII, the Americans with Disabilities Act and the Family and Medical Leave Act don't apply to freelancers.
All the above are powerful bottom-line incentives to use contract labor.
Show IRS the money — Classifying considerations for independent contractors
The IRS is fully aware of the employer's potential savings from hiring independent contractors, which is why it scrutinizes employee records for "red flags." If the IRS concludes that you misclassified a worker, you could be liable for back taxes, penalties and interest charges. Not only that, but the reclassified employee could sue to be included retroactively in your benefits plan — another huge cost.
Don't get caught in a misclassification nightmare ... get Using Independent Contractors today!Preventative Steps
The most important safeguards are to maintain accurate records and follow the rules on Form 1099s. If 1099s were mailed on time and filed properly, you may be able to avoid retroactive payroll taxes even if an auditor reclassifies your contractors as employees.
Under so-called "Section 530" tax relief, employers are immune from back employment taxes on misclassified employees as long as they can prove that:
(1) they had a reasonable basis for treating workers as independent contractors
(2) they regularly filed a Form 1099 for each worker
(3) they consistently classified all workers with similar jobs as independent contractors.
The tax liability is limited to one year for employers who misclassify workers.
If you're using any independent contractors — or even considering outsourcing certain work — you need a copy of this guide at your fingertips.
Using Independent Contractors provides you with everything you need to know in order to comply with IRS requirements. Plus, you’ll also find:
- The IRS’ 10-question “test” to establish worker classification
- A sample contract to make freelance relationships stick
- Guidelines for 22 states with contracting rules stricter than the IRS'
- A list of errors commonly made on 1099s
- How to Fire an Employee the Legal Way: 6 Termination Guidelines
- 10 Secrets to an Effective Performance Review
- Small Business Tax Deduction Strategies
- Pennsylvania Prevailing Wage Act
- When cooperation drops as discipline escalates, OK to fire for insubordination
- Your dollars at risk: Protect yourself from personal liability
- Advice, please: How should we implement our first severance pay packages?