Any company that uses contractors must worry that state or IRS auditors can question the status of those workers and try to reclassify them as employees. In some industries, tax audits aren't a matter of whether, but when.
Take the case of a business owner we'll call John Doe. Sixty independent contractors haul construction materials for Doe's trucking company, using their own trucks, which bear Doe's company name on removable placards. Earlier this year Doe faced off against state auditors in Illinois (a notoriously tough state) and won.
His foresight helped him. Doe had conducted his business with an inevitable audit in mind. He had stopped handing out company caps to drivers after hearing of a case in which caps were used to help prove that drivers were employees.
And when notice of his audit arrived, Doe, who'd been collecting evidence of his independent contractors' status, gathered even more. At the audit he had some proof of independent status for every driver. Included in his files:
· A signed independent-contractor agreement from every driver, drafted by a lawyer. (Such agreements should spell out, for instance, that contractors pay their own expenses.)
· Copies of 1099 forms from contractors' other clients, to prove that the drivers weren't working solely for Doe's company -- or, in lieu of 1099s, copies of the drivers' tax forms.
· Oil and gas receipts, to demonstrate that the drivers, as owner/operators, paid those expenses themselves.
· Business cards, personalized invoices, and advertisements drivers had placed. Doe even accepted promotional pens.* * *