It pays to be careful when hiring a contractor at your business. Whether or not a worker is classified as an employee or an independent contractor matters greatly for tax and employment law purposes. Also, keep in mind that government agencies regularly audit companies they think might misclassify employees as independent contractors. Hiring a contractor in place of a regular employee can be the smart thing to do for your business, though, so here are some guidelines to keep in mind.

You can also visit FindLaw's Hiring Process section for other helpful articles and resources to help guide you through the hiring process.

Determining When Someone Is an Independent Contractor

When deciding whether or not hiring someone as an independent contractor makes sense, it's helpful to understand how an independent contractor differs from a regular employee. The major difference is the level and type of control the employer has. For an employee, you determine how, when, and where the individual will accomplish a task. Employees are given assignments, space to perform their work, and instructions on how to accomplish their assignment. In essence, you "control" the employee. An independent contractor, on the other hand, is given an assignment; and while you have the right to control the outcome or product, you generally don't have a say about how he or she goes about completing the assignment.

How the IRS Determines Your Business Relationship

It's also helpful to see how the Internal Revenue Service (IRS) determines the business relationship between you and whomever you've hired. In determining if someone is an employee or independent contractor, the IRS looks at the following factors:

Behavioral Control: The IRS first looks at factors that demonstrate how much control an employer exerts over a worker to perform specific tasks that he or she has been hired to do. Generally, an independent contractor:

• Isn't given instructions or training on how to perform the work
• Isn't evaluated on his or her job performance.

Financial Control: The IRS then looks at factors to determine the extent of an employer's financial control over a worker. Ideally, an independent contractor:

• Has his or her own equipment or facilities.
• Pays his or her own business or travel expenses.
• Offers his or her services to the public.
• Is paid by the job or task
• Has opportunity for profit or loss (to contrast, there is no opportunity for profit or loss for hourly paid workers).

Relationship between Worker and Employer: Finally, the IRS sees how each side characterizes the other, and how each side sees itself. Typically, an independent contractor:

• Isn't provided with employee benefits.
• Is hired with the expectation that the working relationship will not continue indefinitely.
• Performs services that are not a part of the employer's regular business activities.
• Has signed an Independent Contractor Agreement.

Creating an Independent Contractor Questionnaire

In preparation for a possible future audit, it can be very helpful to have independent contractors fill out a questionnaire. Design your questionnaire in light of the factors discussed above, and keep in mind that your goal is to elicit answers demonstrating the worker is indeed an independent contractor. In addition to the factors discussed above, try to elicit information such as:

• Whether the independent contractor has any professional or business licenses
• Whether the independent contractor has worked as an independent contractor for other employers in the past
• How the independent contractor's business is structured
• How the independent contractor advertises his or her services
• Whether the independent contractor has business cards or business stationery
• The number of people employed by the independent contractor
• Whether the independent contractor maintains a separate office
• Whether the independent contractor owns any business-related equipment
• Whether the independent contractor carries business-related insurance

Require Documentation Demonstrating an Independent Contractor Relationship

Finally, gather as much documentation as you can to demonstrate that your worker is in fact an independent contractor. Common documents include:

• Copies of the independent contractor's business or professional licenses
• Copies of any advertising the independent contractor has done
• The independent contractor 's invoices for billing
• Certificates showing the independent contractor has insurance, such as general liability insurance or workers' compensation
• A copy of the independent contractor's business name (if he or she has one)
• The independent contractor 's business cards and/or stationery
• A copy of office lease
• Copies of 1099s issued to independent contractor from other companies
• The names and salaries of any assistants the independent contractor uses
• The names and addresses of other clients or customers the independent contractor worked for in the past few years

Once you have established an independent contractor status and have the proper documentation, make sure to sign an independent contractor agreement.

Getting Legal Help

As you can see, misclassifying independent contractors can lead to problems in the future. If you have any questions or concerns about hiring an independent contractor, you may want to contact a local employment lawyer for help.