An independent contractor agreement is a written contract between two parties for a specific service or project. One person or company hires another to help on a short-term task. Unlike an employment agreement, this document clearly spells out why the party being hired is not an employee for legal and tax purposes.
It might seem obvious when you hire an independent contractor or subcontractor to have them sign an applicable agreement, but many businesses, prime and subcontractors fail to draw the line. The independent contractor agreement NAOSSOFT draws up will detail:
⦁ IRS tax withholdings
⦁ The subcontractor’s required provision of a W9 to the contractor
⦁ The contractor’s required provision of a 1099 form at year’s end for the subcontractor’s tax filing purposes
⦁ Self-employment tax payments
⦁ The absence of any promise to pay for profit sharing, pension, paid holidays, paid vacations, insurance, unemployment compensation or any other employment benefits
⦁ Social Security benefits
The subcontractor agreement will include a clause for defining the payments the subcontractor will receive. Additional details include:
⦁ Maximum work hours each week or month
⦁ Subcontractor payment milestones
⦁ The expected timing of invoices
⦁ What happens in the event there is more time needed
⦁ Whether or not the project provides a flexible payment option
The US Department of Labor (DOL) and the Internal Revenue Service (IRS) conduct regular company audits to find employees who have been misclassified as contractors. The subcontractor may sue for compensation because you failed to specify the relationship through a contractor agreement.
The ramifications for classifying employees as independent contractors can include:
⦁ A $50 fine for each unfiled W-2 form
⦁ Monetary penalties from failing to withhold income taxes (potentially 1.5% of paid wages, 40% of FICA taxes not taken from employee wages, and potentially interest for late filing)
⦁ A failure-to-pay tax penalty, which can total anywhere between 0.5% and 25% of the employer’s taxes depending on how long the employer has misclassified the employee and failed to pay the appropriate taxes
The IRS may also impose additional fines and penalties if they suspect fraud or intentional employee misclassification.