Nexus Implications of Hiring Independent Contractors
- Jun 22, 2015 | Tim Parker
Hiring independent contractors seems like the perfect way to gain skilled employees without all of the hassle and expense of hiring a full-timer. You don’t have to pay benefits and taxes, there's no need to provide office space, and they provide their own vehicle, tools, and computer.
But look at the details if you're hoping to use contractors to avoid paying taxes in states where you do business. Hiring a contract salesperson gives you nexus wherever that person is based.
What is nexus?
Nexus, in it’s most general sense, is a connection. In the tax world, if you have a nexus, or connection, to another state, you’re liable for collecting sales tax or paying income tax.
Most states define nexus as “maintaining, occupying, or using permanently or temporarily, directly or indirectly or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.”
The definitions also indicates that a business has nexus if it maintains "a representative, agent, salesman, canvasser, or solicitor operating in this state under the authority of the retailer or its subsidiary on a temporary or permanent basis.”
In less technical speak, if you have a representative publicly handling your business in the state, you’ve probably created nexus.
Does my contractor create nexus?
Hiring an independent contractor creates nexus if you're hiring someone to interface with your customers. If you contract with anybody who isn’t a sales professional—a virtual assistant, an ad agency, or any other contractor that provides services to your company—you probably won’t create nexus. In general, you only generate nexus when the contractor provides services on behalf of your company to your customers.
Even activities not associated with direct selling could establish the connection. According to Daniel Petri, Esq., a licensed tax professional at Tax Defense Network, “Depending on the state you're working in, events such as conferences and tradeshows can constitute activities which could trigger tax enforcement.”
Most tax professionals agree that the subject of independent contractors is actually pretty simple. States look at the nature of the activity rather than the type of employee doing it.
Petri says, “Independent contractors are often indistinguishable from company employees for the purpose of determining nexus guidelines.”
Contractor vs. employee
If you were hoping that an independent contractor would keep you from establishing nexus in other states, that’s not likely to happen unless they’re only providing services to you and not your customers.
If you do want to avoid nexus by hiring a contractor who doesn't serve your customers, first make sure that your contractor is actually a contractor. In general, if you control their work schedule, require them to wear a uniform, and directly oversee their work, the IRS would likely consider them employees. Just because they don’t work at your office doesn’t make them contractors.
Incorrectly classifying a worker can be expensive. IRS form SS-8 will help you determine the status of the worker and how you should treat them if you want them to remain independent contractors. Of course, if the person is actually an employee by IRS standards, that will create nexus.
According to Petri, “Seriously consider working with a licensed tax professional to ensure you're 100 percent compliant with each applicable state's nexus requirements.”