A business contracting with an IC is commonplace but may be risky. IRS or EDD may reclassify an IC as an employee resulting in costly employment taxes. So, may contracting with an IC be safer?
1) If work requires worker to have a California contractor’s license, be sure worker is licensed. If not licensed the worker will be your employee. (Also follow the procedure you should follow when contracting with any IC: Tell him/her the result you want, satisfy yourself that he/she is qualified to accomplish it, agree on a price or method to determine the price (e.g., time and materials), agree on the project’s completion time and do not supervise the process. Thus, IC may accomplish the end result without your control.)
2) When the worker performs his/her services through a corporation or LLC, contract with that entity, not the individual. Pay the corporation or LLC. Now you have a business to business transaction and virtually remove “employment” questions.
3) If worker performs services personally, he/she should as a sole proprietorship business. Ask business questions: Does IC have a fictitious business name? Is worker performing services in relation to accomplishing something outside of your business purpose? (E.g., if you sell shoes, do you want the IC to clean your store in off hours?) Is he/she skilled enough to perform the work without you supervising? If you answer all these questions “yes”, you have covered main issues to establish an IC relationship.
Chris Schaefer submitted the above to Small Business California (www.smallbusinesscalifornia.org/, one commented:
“I don’t think # 3 is complete. EDD and IRS will probably consider this person an employee if you are their only source of income. For instance, a seamstress working from home as a sole proprietor would still be the company’s employee if she/he sews only for the company and no one else.”
Chris Schaefer’s answer: Is a worker in business or not? The EDD and IRS “business test” usually centers on “economic reality”, i.e., a possibility of profit or loss. Multiple clients or customers are indicative of normal business. But, two questions arise. First, does the worker “have the right” or option to have multiple clients or other sources of income? Second, does the principal have a right to demand the worker perform services only for the principal’s business? So long as the answer to both is worker may work for others, IC may remain in a business relationship.
“Seamstress” is another issue: My example indicates worker should perform services that are not part of the profit making business. So, if a seamstress is asked to make uniforms for the business’ employees, then that would require a limited number of uniforms, is outside the normal profit making business. Such “not part of profit” work becomes a short term project and indicates IC. A work relationship which is continuous indicates employment, but is not conclusive without other elements supporting employment.
Hopefully the answer gives an idea of how intertwined the test elements are. One cannot look at just one element and say that indicates a person is an employee. One must combine, compare and contrast all the facts of the relationship between the principal and the worker in order to weigh the facts in relation to the total control the principal has over the worker before coming to a conclusion.
