Practice Areas

IDES and IRS Audits: Why Does the Company Need to Prove Independent Contractor Status?

July 2009

When companies are audited by the Illinois Department of Employment Security (IDES) [or any state unemployment insurance agency] or the IRS, companies start out logically assuming that they are "innocent until proven guilty" on the independent contractor issue. WRONG!

The legal requirement for a company using independent contractors is that the company is presumed by the IDES or IRS to be the legal employer of the independent contractors. Therefore, when a company pays the worker to perform services, those workers are presumed to be the employees of the company upon audit. This means that every company that uses independent contractors should be seriously preparing, way before there is an audit or any other legal challenge, to prove that these independent contractors and not employees of the company.

How does a company prove that the independent contractors are not its employees? The "big picture" is to prove that the independent contractors are self-employed.

Effective proof consists of documents showing that the worker holds himself/herself out under his/her own business name, checks from the company made out to the independent contractor's business name with the independent contractor endorsing those checks with his/her business name, IRS Forms 1099 made out to the business name of the independent contractor, etc.

In addition, the IRS and the IDES (or any state unemployment insurance agency) have their own detailed checklist of rules and regulations to prove that the workers are independent contractors. The company must prove that the independent contractors meet the requirements of those rules and regulations.

There are many "practical steps" that a company can take to lower its risk in using independent contractors. Nancy Joerg can cost-effectively review your independent contractor agreement, your website, your independent contractor files, and any other documentation that you use with your independent contractors. Call Nancy at (630) 377-1554, or email najoerg@wesselssherman.com, to schedule a phone conference or a meeting.