The underlying nature of your contractor relationship (according to the IRS definition) should be INDEPENDENCE. The IRS wants to see that your contractor is COMPLETELY independent of your business. The contractor should be calling the shots on how they work. (This goes far beyond the ‘use of tools’, by the way.)
We see a LOT of no-no’s in the wedding industry in regards to contractor relationships. Here’s the deal: if you have someone classified as a contractor that should be classified as an employee, you could end up owing years of back taxes.
Here are 3 things you should NOT be doing with your contractors:
1.) You should NOT be training your contractors.
Training is something that you do with internal employees. You want to teach them how things are done in your business. You want educate them so that they have the skill set to perform. By nature, a contractor should be an expert at what they do. They should be coming to you with a skill set that enables you to hand over work to them without much guidance.
2.) You should NOT be giving contractors your company manual (or policy handbook).
Because a contractor does not work for you, you can’t tell them how to dress, what your company core values are, or any internal company policies that you expect them to uphold. You shouldn’t be giving them your employee handbook to follow. You can specify service expectations in the contract that you spell out. (This can include confidentiality clauses, social media ownership, and service fulfillment scope.) And, you can casually mention that ‘we all wear black at our events’. But, this cannot be a requirement.
3.) Recording their fees as ‘payroll expense’ in your accounting.
Payroll is for employees. Any payments made to contractors should be put in a separate account from that of your employees. It should be labeled ‘Contractor Expense’ (or Subcontractor Expense). Mingling these funds can pull up a red flag if you are ever audited. A ‘normal’ tax audit can turn into a labor audit which can add complications to an already complicated situation. (I’m SUPER-DUPER careful about separating this when I help wedding pros set up their Quickbooks.)
Here’s a tip…
Use the relationship you have with your web designer as a gauge for what the contractor relationship should be. (Your designer is an independent contractor to you, as is your bookkeeper, your attorney.) Would you train your designer? Would you give your designer a dress code? Would you pay your designer the same way you pay your employees?
Does this FREAK you out? 🙂 It does to most people we talk to.
Check out The People Plan toolbox and workshop for help on this and other human resources issues.