Commentary - Using Independent Contractors in Construction

Outsourcing work to independent contractors is probably more common in the construction industry than in many other industries.

Bringing in qualified independent contractors to handle various aspects of a project with tight deadlines makes perfect sense.

It also makes financial sense.

Know the ground rules

Don't let the financial advantages of hiring independent contractors blind you to the need to consistently treat them as independent contractors. Familiarize yourself with the factors the IRS uses to help differentiate an independent contractor from an employee.

If you misclassify an employee as an independent contractor, the IRS and state tax authorities will seek unpaid payroll taxes - and most likely penalties and interest on that amount - from your company.

You could be forced to provide the worker with the same benefits you provide for your employees.

What the IRS examines

The IRS reviews a wide range of common law factors in determining whether a worker is an employee or an independent contractor. Depending on the circumstances, such factors include:

Behavioral control: Independent contractors are not under the direct supervision and control of company personnel and do not receive detailed instructions about how work is to be performed.

Examples of such instructions include:

* When and where to do the work;

* What tools or equipment to use - independent contractors furnish their own tools and equipment;

* What workers to hire to assist with the work;

* Where to purchase supplies and services;

* What work must be performed by a specified individual; and

* What order or sequence to follow.

Even if no instructions are given, behavioral control may exist if the business has the right to control how the work is performed.

The issue of training also is weighed by the IRS. Independent contractors do not receive company-provided training about procedures to be followed and methods to be used in performing a task.

Financial control: The facts that determine whether a business has the right to control the business aspects of a worker's job include:

* The extent to which the worker has unreimbursed business expenses - independent contractors typically pay their own business and travel expenses;

* The extent of the worker's investment;

* The extent to which the worker makes services available to others;

* How the business pays the worker - an independent contractors are usually paid separately by project; and

* The extent to which the worker has the opportunity to realize a profit or loss - contractors may realize a profit or suffer a loss while performing contracted services.

Certain factors can illustrate the nature of the parties' relationship:

* Written contracts that describe the relationship the parties intend to create;

* Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay;

* The permanency of the relationship - an independent contractor's services typically are for separate and distinct projects, but employees also may be hired on a seasonal or project basis.;

* The extent to which services performed are key components of the company's regular business;

* Whether a worker is hired with the expectation that the relationship is for more than a specific period or project, then the IRS will consider this factor as evidence of an employer-employee relationship.

Stephen H. Berardi, CPA, is a principal at Mengel, Metzger, Barr & Co. LLP and can be reached at