Independent Contractors

You can find out what to expect on an udit as an independent contractor by going to www.irs.gov/bus_info/tax_pro/tax-law.html

Firms and workers file Form SS-8 to request a determination of the status of a worker for purposes of federal employment taxes and income tax withholding.
A Form SS-8 determination may be requested only in order to resolve federal tax matters. If Form SS-8 is submitted for a tax year for which the statute of limitations on the tax return has expired, a determination letter will not be issued.
The statute of limitations expires 3 years from the due date of the tax return or the date filed, whichever is later.
The IRS does not issue a determination letter for proposed transactions or on hypothetical situations.
The IRS may, however, issue an information letter when it is considered appropriate

Generally, employees are defined either under common law or under special statutes for certain situations.
Generally, anyone who performs services is an employee if you, as an employer, can control what will be done and how it will be done.
This is so even when you give the employee freedom of action. What matters is that you have the legal right to control the method and result of the services.
This definition is important in relationship to classifying workers as employees or independent contractors.
In general, people in business for themselves are not employees. For example, doctors, lawyers, construction contractors and others in an independent trade in which they offer their services to the public are usually not employees.
You are not liable for employment taxes on the payments to non-employees such as independent contractors.

W-9, W-4 and employment understanding document should be filled out by all independent contractors.
If you’ve made the determination that the person you’re paying is an independent contractor, the first step is to have the contractor complete Form W-9 (PDF), Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the worker. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). The W-9 (PDF) should be kept in your files for four years for future reference in case of any questions from the worker or the IRS.
A penalty can be levied against you, the employer, for omission of this information on certain forms.

From the employer's point of view, it is always better for the worker to be treated as an independent contractor.
The employer can save Social Security taxes, Medicare taxes, workers compensation insurance, disability insurance and unemployment taxes which are all mandatory payroll related expenses.
Employers which have pension and medical benefit insurance plans cannot discriminate and must include virtually all full time employees that meet certain requirements.
For this reason it usually pays to be an employee.
However the truth is, the status of whether one can be properly treated as an independent contractor is not so clear cut.
There is a 20 factor test used to determine ones status.
Please contact a CPA in your area to ascertain how these rules apply to your situation

Yes. Section 530 of the Internal Revenue Code provides an exclusion that pertains to a worker who is not treated as an employee.
The exclusion mandates that: that the employer never treated the worker as an employee; did not hold out any other worker holding a similar position as an employee; filed form 1099 in a timely fashion for that worker; and had a reasonable basis for treating the worker as an independent contractor.

The only tax advantage to being treated as an independent contractor is that your business expenses are not subject to a 2% limitation of your adjusted gross income. The self-employment taxes you pay are net of any business expenses. Independent Contractors who are sole proprietors must file Schedule C.

Although you should have received a Form 1099, there is no excuse for not reporting income you earned during the year.
The burden of reporting is your responsibility, whether you receive a Form 1099 or not.
The penalties for failure to report income can be severe and can be deemed criminal in the worst of cases. Always report all income earned.

There are three safe harbor provisions: judicial precedent, failure of the IRS to question the status in a prior audit, and industry practice.
To qualify for Safe Harbor protection, you must satisfy just three requirements: you must have filed all required 1099-MISC forms reporting to the IRS your payments to the workers in question you consistently treated the workers involved and others doing substantially similar work as ICs, and you had a reasonable basis--that is, a good reason--for treating the workers as Independent contractors.