Here is the tax form the independent contractor uses upon starting work:

Freely download the TAX form: independent contractor w9

The rest of this page can be used for additional information and for a contract template.

You May Want To Have Independent Contractors, But The Truth Is, They Are Likely Employees.  Here is What You Can Do.

Have a really well done, thorough contract that aligns with the current law, and that can help save you, and help prove they were independent contractors.

We have a contract for you to download on this page.

HOWEVER, a contract on its own cannot and will not in itself create an independent contractor relationship.  

Following what the terms of the contract on this page are will go a long way to help you in this regard.

 However, the rules about independent contractors versus employees are very difficult to apply in your business.

Here is what typically happens- You hire someone, and you agree that they will be an independent contractors, and you may even have them execute a W-9, which you should do.

You do not withhold any federal taxes for this person because they are not an employee.

Then, the state tax commission or the employee decides it would be better if they were an employee, so they report the misclassification to the state tax commission, and then you are left having  to  prove that they were independent contractors.

In order to prove that they were independent contractors, you basically have to show that you did not have any control over their method of work, at all.

The IRS has consistently shown that if you had the right to, or did control the employee in almost any manner, then you are their employer.

The reason that this is unfair for employers is that it is close to impossible to imagine a scenario where you hire a person to do a project and you do not exert at least some control over the project, in some way.

Because control is a subjective question and because the IRS highly favors finding an employer relationship, you must understand that the IRS can simply use any tidbit to decide you are in control of this person and they are therefore your employee.

The Penalty You Pay  If You Misclassify a Worker as Independent Versus Employee:

17.5 percent on the wages you paid them.   That is 7.5% on withholding tax and a 10% penalty tax. (Yikes).

This is hardly fair because when you as an employer hired this person, you likely paid them more so that they could  withhold their own taxes.  Now, you could be stuck having to pay their taxes and sure as  heck, they are not going to pay you back for that extra money you were paying to have them as independent workers.

In this way, you must plan on an independent contractor being determined as an employee.  You should save their back taxes as a plan of backup for your company.

There is a 530 safe harbor clause that the IRS has which basically says that if you rely on written court cases that are precedent, or the opinion of your accountant, to classify the worker, then you can be saved from having to pay these back taxes. 

However, we read multiple opinions from the IRS where people were trying to claim the safe harbor and the IRS said you cannot claim it because your decision that the worker was independent was NOT reasonable and therefore no safe harbor for you!

All this said, it is easier on business owners not to have to deal with the red payroll tape, as it were, of having employees.  And, it is expensive to fire employees because bills can bite you back for severance or unemployment.  Also business owners have to pay a salary every month to an employee regardless of the success of the business.  

For all of these reasons, some employers choose to have independent contractors even knowing the risks that it is likely they will be found  as employees.  Though frankly, most just do not know the rules all that well to know better.

The Independent Contract example of this page is written with the goal of clearly establishing an Independent Contractor rather than an employee.

Here is the deal:

This contract was based on 95 IRS opinions that evaluate whether a  worker is an independent contractor or an employee.

In this way, the contract written should  serve as a guide to both independent contractor AND “employer” as to how to avoid creating an employer/employee relationship.

 Here is a sampling of provisions included in the downloadable contract:

TERMS OF AGREEMENT 

1. Independent Contractor will send his/ her w-9 to JohnSmithEmail.com within 5 business days of signing this contract unless it has already been sent.
2. Independent Contractor is free to, and is encouraged to work for others, and make his/her services available to others.
3. Independent Contract workers are not required to do legal education classes, training courses, attend in-person staff meetings or make John Smith Store reports (aside from invoices).

Snippet From IRS Case Defining the 530 Safe Harbor Law:

A taxpayer is treated as having had a reasonable basis for not treating an individual as an employee if the taxpayer’s treatment of the individual was in reasonable reliance on (1) judicial precedent, (2) published rulings, (3) technical advice with respect to the taxpayer, (4) a letter ruling to the taxpayer, (5) a past Internal Revenue Service audit of the taxpayer that entailed no assessment attributable to the taxpayer’s employment tax treatment of individuals holding positions substantially similar to the position held by the individual whose status is at issue, or (6) a longstanding recognized practice of a significant segment of the industry in which the individual was engaged. Act sec. 530(a)(2); Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. at 147; see also Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 276-277. A taxpayer may also qualify for act section 530 relief if it establishes that it had some other reasonable basis for treating its workers as independent contractors. See, e.g., Images in Motion of El Paso, Inc. v. Commissioner, T.C. Memo. 2006-19. If a taxpayer establishes a prima facie case that it meets the reporting consistency and substantive consistency – 34 – requirements of act section 530(a)(1), relied on one of the reasonable basis safe harbors in act section 530(a)(2), and cooperated with all reasonable requests from the Secretary, then the burden shifts to the Commissioner to establish that the taxpayer is not entitled to act section 530 relief. Act sec. 530(e)(4) (added by the Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1122(a), 110 Stat. 1766).

Snippet From IRS Case Deciding That Law Firm President’s Associate Attorneys and Legal Clerks Were Employees and Not Independent Contractors

This case is highly useful to an employer person wanting to see what kind of analysis is ultimately used if their classification of employees is ever called into question:

Petitioner was incorporated on February 18, 1993, as a Louisiana professional law corporation. Petitioner’s business consisted primarily of representing individuals injured in accidents. Fees generated from the provision of legal services were petitioner’s only source of income in 2003 and 2004.3 All attorney’s fees and reimbursements of case expenses were paid directly to petitioner, which then paid a portion of the gross 3Although petitioner handled most cases on a contingency basis, Ms. Willis handled some family law matters on an hourly basis in 2003 and 2004. – 4 – fee (generally one-half or one-third) to the attorney who handled the case. Petitioner was an S corporation for Federal income tax purposes in 2003 and 2004. At all relevant times, Donald Cave was petitioner’s president and sole shareholder.

Donald Cave Donald Cave has been licensed to practice law in the State of Louisiana since May 15, 1969, and he maintained an active trial practice with petitioner in 2003 and 2004. In addition, Donald Cave performed the following services for petitioner in 2003 and 2004: (1) He selected the associate attorneys who would work for petitioner; (2) he hired law clerks to provide legal services to petitioner; (3) he hired petitioner’s support staff, which in 2003 and 2004 included an investigator, a receptionist, and several secretaries; (4) he set the support staff members’ hours; (5) he determined whether petitioner’s workers would receive bonuses and in what amounts; (6) he approved petitioner’s payroll; and (7) he decided whether to make advance payments or reimburse petitioner’s workers for case-related and work-related expenses. – 5 – In addition, Donald Cave owned the professional office building in which petitioner’s principal place of business was located and arranged for petitioner to lease space in the building. In 2003 and 2004 petitioner’s attorneys and support staff occupied only 1 of the 12 office suites in the building, and Donald Cave, as lessor, leased or held out for lease the remaining office suites. Petitioner maintained several client trust accounts, operating accounts, and banking lines of credit in 2003 and 2004. Case recoveries generally were deposited into the client trust accounts, which were under the control of Donald Cave. In addition, Donald Cave was one of only two authorized signatories on petitioner’s checking accounts and was the only attorney permitted to access any of petitioner’s banking lines of credit in 2003 and 2004. Donald Cave delegated some of petitioner’s day-to-day responsibilities to petitioner’s office manager, Elizabeth Wells (Ms. Wells). In 2003 and 2004 Ms. Wells’ responsibilities included preparing petitioner’s payroll, drafting and signing workers’ checks, maintaining petitioner’s books and records, monitoring petitioner’s bank balances, interviewing potential employees, and approving advance payment and reimbursement requests for less than $100. – 6 – Donald Cave received a portion of the fees generated in cases he handled in 2003 and 2004. He also received draws from petitioner of $48,000 in 2003 and $360,000 in 2004.

Petitioner did not require the associate attorneys to work from petitioner’s principal office, to work set hours, or to account for their time.5 Petitioner did not require the associate attorneys to sign written contracts of employment or association, nor did it require the attorneys to sign noncompetition agreements. The record contains no evidence, however, that any of the associate attorneys either offered services to or performed services for other law firms while they worked for petitioner, nor is there any evidence in the record that the associate attorneys offered their services to the public other than as representatives of petitioner. None of the associate attorneys had any clients or cases when they joined petitioner as attorneys, and Donald Cave referred cases to them to help them develop their practices. The associate attorneys also occasionally worked on cases Donald Cave was personally handling. Donald Cave expected the associate attorneys to generate new business for petitioner, and he provided an incentive for them to do so. In 2003 and 2004 the associate attorneys received one-half of the gross fees collected in cases they generated but only one-third of the gross fees collected in cases referred to them by or on behalf of petitioner. The associate attorneys did not receive any other

compensation from petitioner in 2003 or 2004. The balance of the fee remaining after payment of the associate attorney’s share went to petitioner and was used to pay firm expenses, including support staff salaries, telephone bills, and computer and software expenses, and distributions to Donald Cave. When a new associate attorney joined petitioner, Donald Cave recommended (but did not require) that the new attorney attend seminars in maritime law and trial practice, suggested articles for the new attorney to read, and asked the new attorney to attend one or two of his trials. Petitioner did not review pleadings or correspondence prepared by the associate attorneys in cases they generated but did review pleadings and correspondence prepared by the attorneys in cases referred to them. Petitioner generally did not require the associate attorneys to give oral or written status updates regarding their cases but did require oral status updates in cases that were independently generated by one of the associate attorneys and in which petitioner had made an advance payment of case expenses.6

Petitioner did not require the associate attorneys to accept or reject particular cases or kinds of cases, and at least one of the associate attorneys, Michael Cave, rejected some of the cases that Donald Cave referred to him. However, Donald Cave could not recall either of the other associate attorneys ever rejecting a case he referred to him or her.

 

Petitioner provided the associate attorneys with the following: (1) Professional office space (including office furniture, utilities, janitorial services, and security monitoring); (2) secretarial services; (3) letterhead and professional business cards identifying the associate attorneys as petitioner’s attorneys; (4) computers, printers, telephones, copy machines, fax machines, and other office equipment and supplies; (5) access to petitioner’s law library, Internet service, and computer server; (6) premises liability insurance coverage; and (7) advances for certain case expenses. To receive advances for case expenses, the associate attorneys were required to make written requests. As noted above, requests – 10 – for less than $100 could be approved by Ms. Wells, but requests for more than $100 required Donald Cave’s authorization. Petitioner recovered the advances when it received a recovery in the case. If a case did not result in a recovery, petitioner absorbed the loss.

 

Petitioner did not maintain firmwide malpractice insurance in 2003 and 2004 and did not pay or offer to pay the associate attorneys’ malpractice insurance premiums. Petitioner did not offer the associate attorneys health or medical insurance, paid vacation or sick leave, retirement contributions, student loan repayment assistance, or child care allowances.

2003. Mr. Matthews In January 1999 Donald Cave hired Mr. Matthews to provide legal services to petitioner as a law clerk. Mr. Matthews was hired on a nonexclusive basis, meaning he was permitted to work for other attorneys who were not associated with petitioner. Mr. Matthews also was allowed to pursue other business interests, which included serving as a motorcycle safety training instructor and as a consultant in litigation involving motorcycle accidents. Mr. Matthews’ work for petitioner in 2003 and 2004 consisted primarily of doing legal research and preparing pleadings and briefs for Donald Cave. Mr. Matthews also worked on occasion for the associate attorneys. Mr. Matthews was paid a set amount–generally $1,250 every other week. He also received bonuses from petitioner totaling $4,000 in 2003. Mr. Matthews generally performed his work either at his home or at petitioner’s office. Petitioner provided Mr. Matthews with most of the same amenities it provided to the associate attorneys, including a shared office, office equipment and supplies, Internet access, and access to petitioner’s law library in 2003 and 2004. Petitioner also reimbursed Mr. Matthews for some of the expenses incurred in his work. Petitioner did not provide Mr. Matthews with secretarial services, letterhead, or – 12 – business cards and did not offer him health insurance, retirement contributions, or other benefits. Mr. Matthews continued to work for petitioner until its dissolution. As of the trial date, Mr. Matthews did occasional work for Cave Law Firm, L.L.C., but did not use or have access to an office at the firm.

 

2004. Petitioner’s Tax Returns Petitioner filed Forms 1120S, U.S. Income Tax Return for an S Corporation, for 2003 and 2004; Forms 941, Employer’s Quarterly Federal Tax Return, for all quarters of 2003 and 2004; and Forms 940-EZ, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for 2003 and 2004. Petitioner did not treat Donald Cave, the associate attorneys, or Mr. Matthews as employees for employment tax purposes on its 2003 and 2004 Federal tax filings. Petitioner issued Forms 1099-MISC, Miscellaneous Income, to the associate attorneys and to Mr. Matthews for 2003 and 2004. Petitioner did not issue a Form W-2, Wage and Tax Statement, or a Form 1099-MISC to Donald Cave for 2003 or 2004. Donald Cave believed it was appropriate for petitioner to treat the associate attorneys and Mr. Matthews as independent contractors because he did not have sufficient control over their work.8 The record does not disclose, however, the basis on which

 

Donald Cave determined it was appropriate for petitioner to treat the associate attorneys, Mr. Matthews, and himself as independent contractors. Richard Roberts (Mr. Roberts), the certified public accountant who assisted in the preparation of petitioner’s 2004 Form 1120S, reviewed petitioner’s books and records and had discussions with Donald Cave before preparing the return. Mr. Roberts agreed with Donald Cave that petitioner’s attorneys and law clerks should be classified as independent contractors for employment tax purposes but did not investigate the facts or do any research to verify Mr. Cave’s position.

 

In summary, we conclude that Donald Cave was a statutory employee of petitioner for employment tax purposes in 2003 and 2004. See secs. 3121(d)(1), 3306(i); sec. 31.3121(d)-1(b), Employment Tax Regs.

 

The level of control necessary to find employee status generally is lower when applied to professionals than when applied to nonprofessionals. Weber v. Commissioner, supra at 388; James v. Commissioner, 25 T.C. 1296, 1301 (1956) (noting that “there are many eminent lawyers who are full-time employees of corporations and who carry on their professional work with a minimum of direct supervision or control over their methods on the part of their employer”).

https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=9472

 

1. Associate Attorneys Whether petitioner had the right to control the details of the associate attorneys’ work is an intensely factual question. On the one hand, petitioner provided the associate attorneys with minimal training and supervision. Donald Cave suggested (but did not require) that new attorneys attend one or two of his trials, attend particular seminars, and read certain legal articles. The associate attorneys were not required to work from a particular location, to work particular hours, or to account for their time. The associate attorneys were not required to accept or reject – 22 – certain cases or kinds of cases and were free to reject cases referred to them by Donald Cave. On the other hand, petitioner, acting through its president, Donald Cave, controlled the assignment of cases to the associate attorneys and determined whether the associate attorneys would be reimbursed for case-related and other work-related expenses. These facts are highly probative that petitioner had substantial control over the manner in which the associate attorneys performed their work. Petitioner, acting through Donald Cave, also reviewed pleadings and correspondence prepared by the associate attorneys in at least some cases and required them to give oral status reports in certain circumstances. In addition, Donald Cave made suggestions to the associate attorneys about how to handle particular cases, and he expected the associate attorneys to help out occasionally with cases he was personally handling. Finally, unlike the firm in Simpson v. Commissioner, supra, which did not provide the taxpayer with any “leads” to help him develop business, petitioner routinely referred cases to the associate attorneys to help them generate fees and develop practices. On balance, we conclude that the analysis regarding control tips in favor of an employer-employee relationship. Petitioner’s ability to affect the course of litigation by its decisions regarding the funding of litigation, work assignments, – 23 – and working conditions, including the supervision of associate attorneys who worked on cases generated by petitioner and/or Donald Cave, weighs in favor of an employer-employee relationship. The independence of the associate attorneys in dealing with cases they originated for petitioner11 is not sufficient to overcome the control that petitioner exercised, and had the right to exercise, over the operation of the firm and the funding and conduct of firm litigation in general. This factor is indicative of an employer-employee relationship.

 

Although the associate attorneys were not required to work exclusively for petitioner, there is no credible evidence that any of the associate attorneys ever provided or offered to provide services to another law firm during the periods at issue, nor did they offer services directly to the public other than in their capacity as attorneys working for petitioner. This factor is indicative of an employer-employee relationship.

 

1. Mr. Matthews Mr. Matthews’ work was also an integral part of petitioner’s business. Although Mr. Matthews was a law clerk rather than a licensed attorney, his responsibilities– – 31 – conducting legal research and drafting legal pleadings–were crucial to petitioner’s law practice. This factor suggests an employer-employee relationship. The record does not contain any information regarding whether petitioner had the right to discharge Mr. Matthews and, if so, whether there were any limitations on this right. This factor is neutral.

 

7. Summary a. The Associate Attorneys In summary, we conclude on the basis of all of the relevant facts and circumstances that the associate attorneys were petitioner’s common law employees. Three of the five specific factors–degree of control, investment in facilities, and permanence of the relationship–-indicate an employer-employee relationship, and the remaining factors are neutral. In addition, the fact that the work performed by the associate attorneys is an integral part of petitioner’s business supports our conclusion. Keeping in mind that petitioner bears the burden of proof and that doubtful questions should be resolved in favor of employer-employee status, we conclude that the associate attorneys were petitioner’s employees for employment tax purposes in 2003 and 2004.

 

 

A taxpayer is treated as having had a reasonable basis for not treating an individual as an employee if the taxpayer’s treatment of the individual was in reasonable reliance on (1) judicial precedent, (2) published rulings, (3) technical advice with respect to the taxpayer, (4) a letter ruling to the taxpayer, (5) a past Internal Revenue Service audit of the taxpayer that entailed no assessment attributable to the taxpayer’s employment tax treatment of individuals holding positions substantially similar to the position held by the individual whose status is at issue, or (6) a longstanding recognized practice of a significant segment of the industry in which the individual was engaged. Act sec. 530(a)(2); Veterinary Surgical Consultants, P.C. v. Commissioner, 117 T.C. at 147; see also Ewens & Miller, Inc. v. Commissioner, 117 T.C. at 276-277. A taxpayer may also qualify for act section 530 relief if it establishes that it had some other reasonable basis for treating its workers as independent contractors. See, e.g., Images in Motion of El Paso, Inc. v. Commissioner, T.C. Memo. 2006-19. If a taxpayer establishes a prima facie case that it meets the reporting consistency and substantive consistency – 34 – requirements of act section 530(a)(1), relied on one of the reasonable basis safe harbors in act section 530(a)(2), and cooperated with all reasonable requests from the Secretary, then the burden shifts to the Commissioner to establish that the taxpayer is not entitled to act section 530 relief. Act sec. 530(e)(4) (added by the Small Business Job Protection Act of 1996, Pub. L. 104-188, sec. 1122(a), 110 Stat. 1766). With this background in mind, we now consider whether petitioner is entitled to act section 530 relief with respect to any of the workers that respondent determined were employees in 2003 and 2004

 

1977. Mr. Matthews Act section 530(a)(3) clarifies act section 530(a)(1) by providing that act section 530 relief is not available “if the 13As noted above, petitioner treated the associate attorneys as employees during their tenures as law clerks. – 36 – taxpayer (or a predecessor) has treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977.” Petitioner treated Mr. Matthews as an independent contractor in 2003 and 2004. However, petitioner treated the associate attorneys as employees during their tenures as law clerks–when they held positions substantially similar to the one Mr. Matthews held in 2003 and 2004. Consequently, act section 530 relief is not available to petitioner with respect to Mr. Matthews.