In an earlier blog article we gave you a list of documents you should secure from the worker to demonstrate that he or she is an independent contractor. Unfortunately, sometimes the worker does not keep good records, is no longer working with you, or has changed his or her mind and now wants to be an employee, hoping to save some taxes. In these cases, the business needs to rely on its own records. These records should include:
1. Copies of all W-2s and 1099s issued by the company to all workers, both employees and independent contractors;
2. Job descriptions for everyone in the company;
3. Affidavits from all of the workers explaining their relationship with the company and how they operate their business;
4. Copies of the contracts between the business and the workers. If there is no written contract, then a written explanation from your client, as detailed as possible, about the relationship with the workers;
5. Written company policies on training and education. If no written policy exists, then a written summary of practice;
6. Written company policy on the workers’ right to reimbursement of expenses incurred by the workers. If no written policy exists, then a written summary of the practice;
7. If the worker must be identified to the public, for example a television/internet cable repair technician, an explanation about the need for identification;
8. Written company policy on how each worker is evaluated. If no written policy exists, then a written summary of practice;
9. Explanation of how a worker can make a profit or lose money. Specific instances of each can be very helpful. Demonstrate that two workers in the same position can have very different incomes depending on their method of operating and their investment in the business;
10. The company’s financial records regarding payments to workers;
11. Records of workers’ investments in their businesses;
12. Documents showing how worker was first introduced to the company, like advertisements, solicitations, business cards, letterhead, etc.;
13. Records of employee benefits provided or available to the worker.
If the business is going to rely on Safe Harbor relief under Section 530, which we presented in an earlier blog article, it will need copies of the following, if relevant:
1. Documentation of the classification and job descriptions for all workers, both employees and independent contractors, for the audit years and all prior years;
2. Copies of all Forms W-2 and 1099 for all workers, both employees and independent contractors;
3. Copies of any judicial precedent or published ruling supporting company’s treatment of worker as an independent contractor;
4. Copies of any technical ruling or other determination issued with respect to the business indicating the worker should not be treated as an employee;
5. Copies of letter rulings indicating that the worker should not be treated as an employee;
6. Copies of a prior IRS examination where worker or like situated workers were involved in the business and employment taxes were not an issue;
7. Evidence of a long-standing practice of a significant segment of the industry treating like workers as not employees;
8. Evidence of other reasonable basis the company did not treat workers as employees.