Independent Contractor versus Employee in a Home Business

Question from the email box:

My book-keeper comes in once per week to post bills, write checks, and do other various book-keeping tasks for my home business. I'm concerned that she may be spending too much time and that I may have to have to hire her as an employee. Right now I have her as a 1099 contractor. What is your opinion?

There is a lot of confusion about what constitutes an employee and what constitutes an independent contractor. An independent contractor is usually a wonderful fit for a home based business because they can handle tasks that you may not have time to handle (such as the tasks mentioned in the above example). In this way, independent contractors can fill a role in your home business without you having to go through the trouble of hiring and maintaining an employee on the books. After all, who wants to spend their time doing bookkeeping tasks (unless you're a bookkeeper)?

The confusion comes into play when people hear 'horror stories' about the IRS reclassifying contractors as employees and then penalizing business owners for the 'misclassification'. There is also a misconception that somehow time spent is a determining factor in making this distinction. Let's go to the source and look at the IRS opinion on this subject:

The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and Statutory Employees methods of accomplishing the result. IRS Publication 15-A for 2009

In other words, it has more to do with role that the business owner takes than with anything else. If the person asking this question were in the position to dictate how the bookkeeper performs the tasks, then we might have an employer/employee relationship. On the other hand, if the person only tells the bookkeeper "I need this list of tasks done" and is not really concerned with how they get done, then it's a good candidate for independent contractor under the IRS definition.

As with any 'gray area' like this however, it's best to run the situation by a qualified attorney.

Yes I do like to answer questions! Click 'contact' above to send me a question and I'll see if I can answer it or at least throw my 2 cents in.