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Should I Incorporate?
Should You Incorporate?

Many people who want to become independent contractors consider incorporating their business and obtaining a federal tax ID number. Employers often mistakenly believe that engaging such incorporated independent contractors will protect them from tax liabilities. But in fact, the issue of employee vs. independent contractor, how the relationship is structured and who has behavioral and financial control of the work, is actually more germane to the IRS than corporate status.

Employers should know that just because someone claims to be an independent contractor does not mean they are covered under the 1099 rules. It is simple to obtain a Federal Tax ID number for a business, but this ID number is not an automatic protection from employee misclassification. Instead, employers should refer to the 20-point checklist to evaluate the ramifications of employee status. This IRS' 20-Point Checklist focuses on three main factors:
  • How much control the employer has over the worker’s behavior and work results, such as extensive training, supplying of tools, equipment, and materials, where and when the work is performed and how internal co-worker assistance is provided.
  • How much control the employer has over finances. Is the employer responsible for profit and loss or are you? Do you as the independent contractor have a significant investment in the business and incur your own expenses that are not reimbursed?
  • What is the relationship between parties? Does the employer provide benefits such as insurance, pension or paid leaves? Is there a long-term agreement for continued work?
One shortcut to determining proper classification is to ask these five questions that one court asked an employer when considering whether workers were common-law employees:
  1. Who recruited them? (Recruiter/company = more risk.)
  2. Who trained them? (Company training = more risk.)
  3. What was the duration of employment? (Longer assignment = more risk.)
  4. Did the employer have the right to assign extra work? (Yes = more risk.)
  5. Did the employer have control over such things as firing, discipline, and rewards? (Yes = more risk.)
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