By Raymond S. Kulzick, CPA, DBA
As published in the Pinecrest Tribune. April 13, 1998.
Can I save money on payroll taxes by hiring independent contractors rather than having employees in my business?
For a small business, payroll taxes often represent the largest tax the business will pay. Payroll taxes must, by law, be paid on the wages of all "employees." These taxes include Florida and U.S. unemployment compensation and the employer's portion of social security and medicare. Worker's compensation insurance also may be required. Very strict deadlines apply to the deposit and payment of these taxes (and taxes withheld from employees paychecks).
A number of articles have appeared in recent years advising business owners to replace employees with "independent contractors." The independent contractors agree to be responsible for their own taxes (both employee and employer portions), relieving the business of both the taxes themselves and the burden of depositing the taxes and filing returns.
Is this too good to be true? In most cases, yes. The IRS and the Florida Department of Labor have taken very strong positions against the use of "independent contractors" for the purposes of avoiding payroll taxes. Upon audit, if the independent status does not hold up, the business is held responsible for payroll taxes, penalties and interest over a period of years. Sometimes criminal charges also are filed.
The law regarding employment status is complex and if you are contemplating a change you should seek professional advice. As a general guideline to help you decide whether to consider this approach, there are two categories of legitimate independent contractors.
One is those jobs that have been "grandfathered in" either by tax law or by court decisions. These are typically jobs in industries that traditionally have been treated as independent on an industry-wide basis. Examples are independent CPAs and real estate salespeople. However, even these categories may be challenged by the IRS if they are not truly independent in the particular situation.
In the second category, independent status can be shown clearly. Many factors are considered in a given situation, but, the most important is the common law concept that the task actually must be free of control. The IRS uses 20 factors to assist in determining whether or not independent contractor status exists. Examples are: Do the contractors set their own hours, work for more than one business, do the work where they want and how they want, and can they in turn subcontract the work to others versus having to complete it themselves?
If independent contractor status can be supported, the contractors typically sign contractual arrangements and no payroll taxes are withheld or paid on contract payments. The business must, however, report contractor payments on a 1099 form at year-end. The business also needs to be careful about various insurance and licensing requirements that may exist.
Although difficult to support, the use of independent contractors can save a business considerable amounts in payroll taxes, as well as providing a more flexible workforce.
Raymond S. Kulzick is a CPA, and technology and management consultant with offices in Pinecrest at 12177 S. Dixie Highway. If you have questions or suggestions for future columns, please contact him at 305-233-2280 or rkulzick@kulzick.com. More information is also available on the firm's Web site at http://www.kulzick.com/businesspro.
This article provides information of a general nature only and should not be acted upon without seeking appropriate professional advice concerning your specific situation.
© Copyright 1998 Raymond S. Kulzick. All rights reserved. 980413.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.