Working with independent contractors rather than regular employees can save a farmer money. But it’s not a solution for every situation–only if the farmer can give up a good deal of control over the work should independent contractors be hired.
What’s the Situation?
Hiring employees can be expensive. A farmer must pay social security and Medicare taxes plus unemployment insurance or taxes. You can bet folks have been looking for ways to avoid these expenses while getting help on the farm. Many farmers may have heard about hiring independent contractors instead of employees. Businesses large and small save money this way, and the strategy could be a great deal for a farmer.
Where does the law come in?
The savings from hiring independent contractors accrues because they aren’t employees, so the farmer doesn’t have to contribute to the workers’ social security or Medicare taxes. Instead, independent contractors are responsible for paying their own self-employment taxes. To prevent abuse of this cost-savings device, the Internal Revenue Service can impose strict penalties on businesses that are simply disguising regular employees as independent contractors.
Wouldn’t it be convenient if a farmer could call up “Jill’s Weeding Service” whenever he needs help? Or what if a farmer hired a new college grad to take over the farmers market stand and create an online marketing program on her own? Could this approach give the farmer flexibility, freedom, and cost savings? It’s very possible, but before a farmer decides to classify his help as independent contractors, there are a lot of legal aspects of the employment opportunity to investigate.
Broadly speaking, hiring an independent contractor is permitted in situations where you might hire a small business owner. Lets use hiring a plumber as an example. If you hire a plumber to fix the toilet, you hire him or her because of the plumber’s expertise and ability to do the job without oversight. You certainly don’t hover in the doorway suggesting a different brand of plumbing tape. Since you’ve hired another small business owner, you let the plumber do the job as the plumber sees fit. Although this is the basic principle behind who is and isn’t an independent contractor, the IRS has outlined more detailed guidance to help them investigate employee misclassification. Thinking about these questions beforehand will save the stress of an IRS investigation that ends in a stiff penalty for misclassifying your workers.
First, a farmer should ask how much control he or she wishes to maintain over the worker’s actions. Independent contractors don’t get told how to do their work. Instructing someone on how to do their work includes giving direction regarding tool usage, ordering the sequence of tasks, or anything beyond stating a broad objective. Take Jill’s Weeding Service: If you tell Jill only, “Keep my fields reasonably weed-free this season,” you aren’t controlling the means or method of her work. If, however, you say to Jill, “Weed the lettuce first because I’m harvesting this afternoon, and then take the flame weeder over carrots,” that is controlling her work, and you can’t classify her as a independent contractor even if she does own her own weeding business. Dictating which tools to use, when or where to perform tasks, and which individuals are to do which task are key indicators of control.
Second, a farmer must consider how much financial control he or she maintains. Independent contractors have control over their financial situation by, for example, providing the same services to other folks. Back to the plumber: While installing a washroom in the packing shed, the plumber might leave early one day to help another customer with a plumbing emergency. Independent contractors have other customers that they can choose to assist; employees don’t. Independent contractors control their own financial situation, often by accepting a flat fee or charge for time and materials rather than an hourly wage. To use the weeding scenario, if a farmer hires Jill’s Weeding Service to keep the fields weed-free all summer for $8K, Jill controls her profit by dictating the speed and timing of her work. An hourly farm employee does not have that option because she works for an hourly wage.
Third, the IRS will consider the formal classification of the relationship. If farmer and Jill have signed a contract saying that Jill is an independent contractor, the IRS will consider that factor. Finally, the IRS looks at whether the service is a key aspect of the business. Weed control is a key aspect of farming. But on some farms, direct sales are new or experimental. If a farmer who usually sells into the commodity market decides to dabble in direct marketing, the door to an independent contractor opens wider. The farmer could hire a person to be completely in charge of establishing and marketing a direct sales program, pay a flat fee plus commission, limit the relationship to the specific project, and sign a contract. Then the farmer could classify the worker as an independent contractor–and save money and gain flexibility by doing so. Being able to save on payroll taxes and predict expenses allows the farmer to experiment with a new market without the costs of hiring.
Independent contractors can be a great strategy, but only if you truly want to hire someone to work independently of your direction and you take the time to sign an actual contract.
What do you think?
- I know farmers that have good success working with independent contractor weeding crews. What are the strengths and weaknesses of that approach to weeding?
- Rarely do farmers excel in both crop production and marketing. Are independent contractors a solution to that problem or should a farmer strive to be a Jack/Jill-of-all-trades?