By: Nancy E. Joerg, Esq.
In many of the audits that I handle on behalf of Illinois companies who are being audited by the Illinois Department of Employment Security (IDES), the IDES auditor will demand all available proof of independent contractor status - in those cases where the company being audited by the IDES uses independent contractors.
Schedule C's can be one form of very persuasive proof of independent contractor status. The Schedule C is part of the 1040 tax package from the IRS. The Schedule C is used to report to the IRS the Profit or Loss from Business (Sole Proprietorship).
The Schedule C is an IRS form that independent contractors fill out showing crucial information such as: their name as a sole proprietor, their principal business or profession including the product or service, their business name, their business address, such details as gross profit, gross income, total expenses in running their business, advertising (if any), car and truck expenses, commissions and fees if any, their own contractor labor, insurance costs, interest, office expenses, pension and profit sharing plans, rent or lease, repairs and maintenance, supplies, travel, meals and entertainment, and other business expenses.
The IRS Schedule C is often thought of as a big plus in proving independent contractor status, but this is not always true. Sadly, some Schedule C's actually are the final nail in the coffin (in showing that the independent contractor who filled out the Schedule C is really misclassified and is an employee).
Let's look at some successful pieces of information on a Schedule C in terms of proving independent contractor status and what information on a Schedule C actually destroys independent contractor status:
1. If the independent contractor shows that he or she has a business name, that is a plus for independent contractor status. Conversely, if the independent contractor does not have a business name (and leaves that line blank on the Schedule C), that really hurts independent contractor status.
2. If the principal business of the independent contractor is the same as the principal business of the company being audited, then this is unfortunately proof of integration of the company and the independent contractor; this tends to hurt independent contractor status.
Conversely, if the business of the independent contractor and the business of the company being audited by the IDES are different from each other, then this helps to strengthen independent contractor status.
3. If the gross income for the independent contractor as shown on the Schedule C is far more than the income that the independent contractor received from the company being audited, then this is a great strength for independent contractor status.
However, if the gross income of the independent contractor as shown on the Schedule C is the same as the 1099 form that was issued to the independent contractor from the company being audited, then this is harmful to independent contractor status.
4. For the expense section of the Schedule C, the more business expenses that the independent contractor can show on the Schedule C, the greater are the chances that the IDES auditor will consider the independent contractor to be properly classified. One of the hallmarks of a business owner is significant business expenses, so the more business expenses the independent contractor shoulders the better.
Schedule C's can be very persuasive documents to hand to IDES auditors (or any auditor or legal official considering whether a particular worker is properly classified as an independent contractor). But, SCHEDULE C's CAN ALSO BE HARMFUL. NOT ALL SCHEDULE C's ARE CREATED EQUAL. Some Schedule Cs help independent contractor status and some destroy independent contractor status.
Therefore, do not automatically submit Schedule C's to an auditor or a legal proceeding. First, evaluate the Schedule C and see if based upon the general principles enunciated in this article whether the Schedule C will help or hurt your cause.
Questions? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, IL office at (630) 377-1554 or email her at email@example.com.