Outsource it

Tips and traps of using independent contractors

For many businesses, outsourcing has become the wave of the future, permitting businesses to cut operating costs by eliminating employees and benefits.

But before an independent contractor is summoned, a sensible businessperson should consider the risks involved:

Assessing Risks
One of the most important risks is whether the IRS will regard the person performing the work as your employee or as an independent contractor. For instance, your sales representative resigns, but you retain him or her as an independent.

The test used by the IRS is very subjective, and is applied on a case-by-case basis. Thousands of dollars in back withholding and trust fund taxes may be assessed to you by the IRS if the contractor does not meet their notion of control criteria. Simply stated: The independent contractor retaining the ability to select the manner on how work is to be performed. When this is not the case, the business relationship will be ignored for tax purposes and the IRS will slap a levy on the assets of the business. If a company is unable to pay [taxes], the IRS can hold the business owner liable for the tax liability.

Ownership Rights
Ownership involves things that the contractor creates, as in the case of writing software. The law is pretty clear on this. If it is a work-for-hire arrangement, the person paying the contractor owns the product. If not, the copyright is owned by the person creating the work. For the job to be considered ‘work-for-hire,’ a written agreement must be prepared and entered into before the work is created. Any agreement should clearly establish the rights and responsibilities of the parties, i.e., who owns what, what assets belong to your company, and the grounds upon which either party may terminate the arrangement.

The issues involving the use of independent contractors will continue to evolve and may, in some instances, be impacted by overriding federal, state, local laws and regulations. Having a labor or tax attorney on hand will help you understand the risks involved and your rights as a business owner.

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