You’ve decided to hire some extra help for your business. Perhaps you’re now sending all of your graphic design needs to a local graphic designer or maybe you’ve hired a virtual assistant to help with administrative tasks.

Although most business owners understand the value of having a contract in place to govern the relationship between them and a client regarding their services, , they frequently fail to have a contract in place to govern the relationship between the planner and a worker the planner hires to assist in the business.

What is an Independent Contractor?

In general terms, an independent contractor is a person or business – non-employees -who are in an independent trade, business, or profession in which they offer their services to the general public.  An independent contractor runs a separate business and is treated as such.

One way to view whether a worker is an independent contractor is to ascertain the degree of control possessed by the worker.  Generally, an independent contractor has the right to control or direct the way they do the work contracted for, including when, where and how.

For example, let’s say Premier Events Inc. wants to build a new website for their business. Because they don’t have the resources or skills to have this project completed in house, they decide to contract with Sally who is a website developer.  Sally works as a website developer and serves a variety of clients including Premier Events. Sally has her own tools, sets her own works schedule and decides how to go about working on this web development project. In this example, Sally is most likely an independent contractor.

Why a worker’s classification as an independent contractor or employee matters?

Hiring employees (as opposed to independent contractors) tends to impose a variety of administrative responsibilities on the employer and requires an employer to pay for a variety of taxes or benefits including, but not limited to, federal taxes, social security, Medicare, unemployment, and state taxes, as well as workers compensation insurance, and other employee benefits.  A business doesn’t incur these obligations when it hires an independent contractor, thus usually resulting in a financial savings and less administrative burdens.

Incorrectly classifying an independent contractor can be quite costly for a business owner. If a federal or state agency concludes that an employee has been misclassified as an independent contractor, the employer may be subject to paying back taxes and penalties, for example.

A business owner’s decision whether someone is an independent contractor is subject to review by numerous federal and state agencies, including the IRS, the Labor Department, state tax departments, and unemployment and worker’s compensation agencies.  Moreover, the agencies each apply different factors to determine whether a worker has been properly classified as an independent contractor. There is no one test that applies across the board.

Why you might need an Independent Contractor agreement?

• May Support Your Independent Contractor Classification

If a government agency questions your independent contractor classification of a worker and audits your business, a written independent contractor agreement may help prove that you and the worker have entered into an independent contractor relationship. While having a carefully drafted contract with your independent contractor doesn’t necessarily qualify a worker as an independent contractor, it can help tip the balance in favor of an independent contractor classification when it’s a close call.

• Sets the Parameters of Your Working Relationship

As with any working relationship, a contract can be useful in clarifying the working relationship between you as the business owner and a worker. It might include clauses regarding the services to be performed, the compensation and such. But it can also address other important issues such as who owns the intellectual property rights to work that is created by the independent contractor and how the business owner’s confidential information will be treated by the independent contractor.

Take the quiz here to find out which contracts you need for your business.