The bank account is open, the name is on the building, the product is ready to be sold, and the CPA and attorney have been hired. The small business checklist has been completed.
Initially, a small business owner may be the only person working in the business to keep costs down. However, as the business begins to grow I will get questions such as: “If I need help and would like to hire someone, do I have to set them up as an employee?” and “Can I pay them cash and issue them a 1099?”
In these instances, I refer to this 20-point checklist from the IRS for independent contractors. These questions are adapted from court cases and rulings, and provide some guidance in determining whether a worker is an independent contractor or an employee. The checklist I refer to is one of many that exist to assist in determining employee-independent contractor status, and should only be used as a guideline rather than as determinative guidance.
- Profit or loss: the worker can either make a profit or suffer a loss depending on the job performance – not just related to the risk of not getting paid?
- Investment: does the worker have an investment in equipment or facility to do the job?
- More than one firm: does the worker perform the same work for other companies?
- Does the worker offer services to the general public?
If the client says yes to these four questions then the client more than likely will have an independent contractor relationship with their worker. If this happens, be sure to have the worker fill out Form W-9, Request for Taxpayer Identification Number and Certification. This will allow the client to obtain the necessary information to give the contractor a 1099-MISC at the end of the year if applicable.
- Work Hours: does the employer set the worker’s hours – when they must report to work and leave?
- Tools and materials: does the employer provide the workers with the equipment to perform the job?
- Full-time work: does the worker spend all of his or her working time on this particular job?
- Does the employer have the right to fire without risk of breach of contract?
- Pay schedules: does the employer pay on a set schedule?
- Instructions: can the employer tell the worker when, where, and when to work?
- Integration: has the worker become a necessary part of the business?
- Training: has the employer trained the worker in a particular way unique to the business?
- Services rendered personally: does the worker provide services personally, as opposed to delegating work to others?
- Hiring assistants: does the employer hire, supervise and pay for the worker’s assistant?
- Work done of premises: must the work be performed on the employer’s premises?
- Expenses: does the employer pay business or travel costs for the worker?
- Worker’s right to quit: can the worker quit at any time, without incurring liability?
- Continuing relationship: is there an ongoing relationship between the worker and the employer?
- Reports: must the worker submit reports accounting for his or her actions?
If a client can answer yes to any of these questions, then he or she likely has an employee. At this point, we will work with the client on setting up employees and direct them to Circular E, Employer’s Tax Guide (IRS Publication 15) to help them get started. In addition, our office has created a new hire package that we give to our clients to give to the employee. This includes the following forms:
- W-4 Employee’s Withholding Allowance Certificate
- WH-4 Employee’s withholding Exemption and County Status Certificate
- I-9 Employment Eligibility Verification
- Indiana new hire reporting center employer form
In our line of work, being proactive is key to our success and our clients. Providing our clients with the essentials on starting a new business and continuing the guidance in determining the right fit for their company will help build a long-lasting relationship with the client.
More information can be found on the following websites, www.irs.gov, www.in.gov/dor and www.in-newhire.com.