Many home improvement and remodeling companies classify their installers as "independent contractors" for federal and state tax purposes, saving up to 15% in payroll taxes and administrative costs. However, if the IRS or a state tax agency finds that you misclassified a worker, you may be subject to substantial tax penalties, in addition to back employment taxes and interest.

Unfortunately, there is no safe harbor for treating an installer as an independent contractor. Both the IRS and individual states often use the "20 common law factor" test in determining whether or not to reclassify the tax treatment of a worker. We don't have space to discuss all 20 factors here, but having a detailed written agreement with your installers is one of the most important steps to take to protect yourself. However, the written contract will not be persuasive without supporting evidence. The following precautions are an employer's best defense during a state or federal examination:

* When possible, the worker should be hired as a company or business, rather than as an individual. The best scenario is to have the worker be a single-member limited liability company, but even having him operate under a sole proprietor business name is helpful. Have checks and invoices made payable to the company or business, not the individual.

* The employer should maintain proof that the worker had his own state licensure, liability insurance, and workers' compensation insurance.

* Companies with significant exposure concerns should have some internal record of their workers acknowledging their status as independent contractors. This can be done with either a written form or consensual audiotape.

Words of warning

The IRS and some state tax agencies may request that the employer or workers complete a "Form SS-8." This is a heavily biased form designed to support reclassification, and completing it will almost always subject the business to a reclassification examination. Disgruntled workers often provide the most damaging statements on these forms, and they are hard to rebut, because the identities of the workers are not disclosed. Any business should first consult legal counsel before completing an SS-8.

State audits are usually triggered by a disgruntled individual, often filing for workers' comp or unemployment. On occasion, it may be faster and less expensive to pay a small claim rather than assert that the worker was an independent contractor and risk a full examination. --D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (, a national law firm specializing in the home improvement industry. Contact him at (703) 759-1055 or This article is for informational purposes only and should not be construed as legal advice.