To protect against expanded IRS reclassification of ICs as employees, tax lawyer Robert Woods, who specializes in employment tax issues, urges you to have a written agreement with all ICs that should include the following key items:

• Names—and titles: The agreement should clearly state that the worker is an IC, not an employee, and avoid words indicating an employment relationship.
  
  
• Training instructions: ICs largely get their own training and decide when, where and how work is done. You can set work standards, but avoid ongoing instructions.
  
  
• Delegation: An IC who is permitted to delegate at least some work to his/her own workers and train them and who is then responsible for their results is likelier to hold up as an IC in an IRS or other worker classification audit.
  
  
• Work periods: Ideally, the contract should be for 1 year or less, with renewals, and not include employer-set work hours. Longer terms and employer-set hours indicate employment.
  
  
• Exclusivity: ICs who work exclusively and full time for one firm are likely to be deemed employees, regardless of other factors. True ICs are available to work for other companies. AIPB tip. The IRS scans IC contracts for noncompete clauses. An IC is, by definition, independent, and should be allowed to service others.
  
  
• Periodic reports: Requiring progress reports from ICs indicates control and thus employment. Be concerned only with the IC’s final product.
  
  
• Compensation: When possible, base compensation on output. Time-based payment, hourly or other, usually indicates employment—but not always.
  
  
• Expenses: ICs usually pay their own overhead and expenses (except perhaps travel), so they should pay for their supplies and equipment. State this in the contract. If needed, increase the contract price rather than pay an IC’s expenses.
  
  
• Risk: It should be possible for an IC to lose money —at least theoretically.
  
  
• Termination: Both parties should be able to terminate on 30 days’ notice for any reason.
  
  

If you need help with any of this, please contact me at kjohnson@proactbookkeeping

Reprinted by permission of the AIPB