Monday, July 11, 2011

Contractor vs. Employee?

Most small businesses are better off with contractors instead of employees since the overhead cost is lower. But beware of misclassifying. The IRS has rules that stipulate when a contractor has crossed the line into employee territory. This can be a costly mistake and also land you into quite a bit of trouble with Department of Labor. There are certain general guidelines, such as how much the company controls scheduling and compensation, which weigh in on the decision. But even the IRS will admit every situation varies. If in doubt, you can file a form SS8 with the IRS to have an official ruling. But be advised that this can take up to six months. If nothing else, a good rule of thumb is to document your relationship through signed written agreements and make sure all compensation is documented. And of course, rely on a well-trained bookkeeper for guidance!