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It's
all in the files...
At
a recent Department of Labor audit with one of our clients,
I realized how fortunate it was that he had hired someone
to get his files and bookkeeping in order. Having a good
filing system and keeping papers filed in it are a key ingredient
to relatively pain-free audits of any kind.
This
particular audit seeks to ensure that you are paying the
appropriate employer taxes and Workers' Compensation Insurance
on all "employees." While for the most part, the
State is looking for Workers' Compensation Insurance and
Unemployment Taxes, they do inform the Federal government
if they find you are treating someone as an "independent
contractor" but are unable to prove the person is not
an empolyee. (That's right, they require you to prove
the person is not an employee!) If you cannot do
this, they will re-classify the person and charge you unemployment
taxes on that person and require you get Workers' Comp coverage
on them.
Following
are some of the evidence you can use as proof. Your subcontractor
or independent contractor files should contain some if not
all of these documents:
- Form
W-9 showing name, address and federal ID number. If the
contractor is a Corporation, you are almost home free.
This form is not optional.
- Workers'
Compensation Insurance Certificate or a Business Liability
Insurance Certificate (sometimes called an "Accord"
certificate). Insurance coverage of one form or the other
is not optional. Get proof!
- Business
references from the contractor showing jobs done for other
companies will help prove that the contractor is a legitimate
business.
- Business
card, letterhead, Yellow Pages listing, advertising, etc.
that show the person is actually running a business independent
from the work done for you.
- Contract
and/or invoices from the contractor showing name, address,
itemized work done, etc. Always require this as it keeps
the relationship formal.
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Workers'
Compensation Insurance - Who needs it?
I just
did some investigation on Workers' Compensation Insurance
and thought I would share some of the information with you:
- Owner/employees
are not required to have Workers' Compensation Insurance
coverage. Those of you that are S Corporation Shareholders
fall under this category. You don't need to worry about
Workers' Comp until you hire employees.
- As
far as I can tell, Pinnacol Insurance has a monopoly on
Workers' Comp in Colorado. Many agents are brokers for
them, but it traces back to Pinnacol in every instance
I have investigated so far. I have been completely unable
to find another insurance company that offers Workers
Comp coverage for this state.
- If
you hire an independent contractor and do not have sufficient
evidence of insurance coverage and independent status
as in the preceding article, you can be required to provide
Workers Comp coverage on them and pay for it. In construction
type businesses, this can be 25 - 30 percent of the amount
paid to the contractor - enough to wipe out profits completely.
Be
smart. Get your independent contractors to provide you with
the paperwork needed to prove their status. You are totally
justified in withholding payment from them until they do
and it is a good idea to retain a least a portion of their
pay until the needed documents are furnished. Then, create
contractor files that will do the work should you have an
audit.
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