Many small business owners, including commercial photographers, are caught in the independent contractor trap. The part-time or full-time assistant or second photographer they’ve been paying should have been classified as an employee, not an independent contractor, according to the U.S. Internal Revenue Service definition. These trapped business owners find themselves in hot water with the IRS, owing back taxes and penalties for failing to withhold income taxes from the money they paid their assistant.

This PhotographyTalk article presents some basic information you need to know to avoid the trap and protect your business.

1. Arm yourself with an employment/independent contractor agreement before “hiring” an assistant or a second photographer. Meet with your attorney and/or accountant and explain that you want to “hire” an assistant, and to understand the tax implications. Based on exactly what you expect your assistant to do and how often, your attorney/accountant will help you determine his or her employment status. You and your attorney should then craft an employment/independent contractor agreement, signed by your new assistant, and detailing the exact employment relationship.

2. Here’s another bit of information that should help motivate you to avoid the independent contractor trap. During early 2010, the IRS initiated the three-year National Research Project (NRP) audit program. The plan calls for the random selection of 2,000 companies, small and large, for-profit and non-profit, and public and private. The IRS wants to study these companies’ records, especially those that filed Form 941. All companies must file this form quarterly to report the total income tax withheld from employees’ wages. The IRS states that this study will help it develop a new audit selection policy.

A number of states’ taxing agencies are also closely scrutinizing companies to determine the exact employer/employee relationship of their workers, assistants, associates, etc. Being on the wrong side of the employment laws in some of these states could result in some businesses losing their state business license.

Since the IRS and maybe the tax people in your state could pick you as a source of data for their studies, this is the best time to put your house in order. If you already have an assistant or second shooter, then contact your attorney or accountant soon and discuss his or her employment status. You may also need to initiate that employment/independent contractor agreement mentioned above. If you owe any taxes, then work with your attorney/accountant to report and pay them.

3. You avoid the trap when you know the rules of the game…and the IRS makes the rules. For many years, the IRS applied what was known as the “20 questions” or 20 factors to determine whether a worker was an employee or independent contractor. To make this determination a bit easier for business owners and their attorneys and accountants, the IRS has reduced the 20-factor test to three broad categories consisting of 11 “test” points. It’s important to remember that these should only be considered guidelines. A worker’s employment status can only be firmly determined on an individual basis.

4. Behavioral control is the first category. This relates to the employer’s right to direct and control how the worker performs assigned tasks. If the employer instructs the worker when, where and how to work, then he or she is an employee. An employer also has behavioral control if he or she trains the worker to do a task in a specific manner. Typically, independent contractors use whatever knowledge they’ve acquired to complete the task.

5. Financial control is the second category. Five of the 11 “test” factors are in this category. They cover such topics as payment of business expenses, how a worker is paid and whether the worker is able to realize a profit or loss from his or her work.

6. The third category is the type of relationship an employer has with a worker. A worker may be an employee if he or she receives employee-type benefits and works for the employer during a continuous and indefinite period of time.

The information in this PhotographyTalk.com article is general in nature. PhotographyTalk.com does not provide legal or tax advice or imply legal or tax strategies for photography business owners. They should seek such advice from qualified professionals.

Photo copyright PhotographyTalk member Jim Speth

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