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Ask the OSG

How Does NBAA’s New Independent Contractors Guide Help Operators Avoid Tax Pitfalls?

Budget-conscious companies are turning to independent contractors when they need extra help. In fact, four out of five companies use some type of nonemployee labor.

And, why not? They’re quickly and easily available. Companies don’t have to worry about withholding taxes or paying Social Security, Medicare and unemployment insurance. When the job’s done, the contractor moves on to other opportunities and there’s no further commitment from either party.

Classify Workers Correctly

It can be an ideal arrangement. It also can be a perfect nightmare if the Internal Revenue Service (IRS) or the state tax agency decides to review your company’s records, suspecting that you improperly classified the extra pilot as a contractor rather than an employee.

Because tens of billions of dollars in potential tax revenue is lost each year from misclassifying workers, federal and state tax agencies are cracking down and aggressively auditing employers. Those who get caught risk substantial fines and a requirement to pay back taxes.

To help companies avoid misclassifying workers, NBAA’s Employment Issues Working Group and Aviation Insurance Committee published a new guide, Best Practices for Utilizing Independent Contractors. This resource provides managers with regulatory guidance and describes the tests state and federal agencies use to determine if a worker should be classified as an employee or an independent contractor.

Third-Party Oversight

Mistakes aren’t cheap. Auditing, accounting and legal services can drag on for months, even years, said Scott O’Brien, a project manager with NBAA’s Operations Service Group who worked on the guide. To assist with the process of obtaining contingent workers, many employers engage a third-party firm with expertise in the area. The third party hires the workers, controls the payment of their wages, provides them with unemployment insurance, workers’ compensation and other benefits, and essentially is the employer for employment tax purposes. However, if the third-party firm misclassifies employees as independent contractors assigned to clients, the client has significant exposure. This means managers who choose to work with a third-party firm should select a well-established company and ask if the firm compensates its workers as either employees or as independent contractors.

How much control a company has over a worker is a key factor in determining if that person is a contractor or an employee, according to the IRS. Is the company dictating when and how the job will be done? Companies can only control the result of the contractor’s work, not how it’s accomplished.

Another factor is financial. The IRS usually expects contractors to pay their own expenses – tools, supplies, travel, training – whatever it takes to complete a project. Employees, however, normally have these items provided by their employer. This means that independent contractors have the opportunity to make a profit or loss on a specific assignment, while employees do not.

“If I agree to pay my contract pilot a flat fee, the contractor has to figure out how best to make a profit, and he could incur a loss,” said O’Brien.

These are important considerations when hiring extra help, and NBAA’s Best Practices for Utilizing Independent Contractors is just the resource you need to steer clear of trouble.

For More Information

Get the new Best Practices for Utilizing Independent Contractors guide at www.nbaa.org/contractors.

NBAA's Operations Service Group (OSG) is a free benefit for Members needing quick, authoritative information about flying or managing aircraft. OSG staff members are available to answer Member questions at (202) 783-9250 or info@nbaa.org.

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