Do you use independent contractors to run your business?  Are you an independent contractor that works for others?  San Francisco tax attorney Robert Wood offered advice on how to manage relationships with independent contractors in a recent article of Tax Notes Today. 

The top ten mistakes businesses make when classifying workers as independent contractors are:

1. Lacking a written contract.  The responsibilities of each party should be spelled out before work commences.  Without one, you are likely to lose a dispute over a worker's status.

2. Treating similar workers differently. An independent contractor should not have similar responsibilities as an employee of your company.

3. Providing tools and equipment.  True independent contractors typically cover these expenses on their own behalf.  Providing a worker with office space, a desk and PC, and/or other supplies jeopardizes the workers classification as an independent contractor.

4. Reimbursing an independent contractor for expenses.   There is a similar logic between #3 and #4 on the list.  As a general rule, the more expenses you reimburse, the less likely the IRS is to view that worker as an independent contractor.

5. Paying by the hour.  While is is common to pay by the hour for certain services - such as attorneys - it is better to pay independent contractors by the project or piece.  Wood believes paying by the hour is a sign that a worker is an employee rather than an independent contractor.

6. Requiring time cards.  Independent contractors should submit invoices, not time cards.  Additionally, independent contractors are not subject to the terms of employee manuals, and they must provide a completed W9 before the first payment for services is rendered so a 1099 can be issued at the end of the calendar year.

7. Oversupervising a worker's duties.  A business owner can set quality standards and guidelines, but the independent contractor is ultimately responsible for how and when the work is performed.

8. Setting a work schedule.  This is a tell-tale sign that a worker is an employee mis-classified as an independent contractor.  Don't do it.

9. Prohibiting work with other companies.  A business owner can require a certain level of output - or sales - per month, but if you prohibit an independent contractor from working for other companies, you're asking for trouble.

10. Trying to control too much of the worker's output.  Surrendering a measure of control is the price you pay for using independent contractors over employees.  But keep in mind that the expertise an independent contractor brings to the table is generally worth the sacrifice.