VPTax Tips & Triage —Independent Contractors
Startup CEO: You want to work as an independent contractor?
Potential VP Sales: Yes, it’s better for my taxes.
Startup CEO: Hmmm. You’ll be under my direction, use our phones, we’ll own your work, and we’re your only “client” … sounds like an employee to me.
Potential VP Sales: Sure, that’s all true, but let’s not let reality get in the way of life… you can just call me an independent contractor, can’t you?
VPTax: A word of advice… the designation of contractor versus employee is not something to “play around” with.
Having an “employee” versus an “independent contractor” has real tax consequences that governments of the world care about. It’s a substance over form test, meaning what you call these workers is less important that the actual relationship they have with the company.
The use of independent contractors to supplement internal resources is often a sound business move. However, like Netflix and gas station nachos, too much of a good thing can be bad for you.
You may be at risk if:
• You have more contractors than employees
• Your officers are contractors
• A social media search shows contractors with employee titles
• Your contractors only have one client… your company
• You or our executive team dictate the “how” as much as the “what” of the contractors’ work
Heads up, Startup CEO. If you haven’t had an unemployment claim filed by a former “independent contractor”, rest assured that you will. In processing that claim, the tax authorities will review the status you claimed, filing history and tax payments made. And if your employees and contractors are misclassified, your company could be found in violation of wage, benefits and tax laws. On top of the expense of penalties, for now, the liability for unpaid employment taxes falls directly to the corporate officers. Finally, independent contractors that, after the fact claim they were employees, can (and will) also claim all the rights and benefits employees receive like insurance, retirement benefits and even stock option grants!
VPTax can help you avoid being caught on the wrong side of an employment tax audit. www.vptax.com