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Independent Contractor vs Employee: Sales Tax Nexus Implications

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Independent contractors are often a viable option and necessity for many businesses. If a business cannot afford to hire a full time employee, then it often looks to an independent contractor to limit payroll costs, benefits, unemployment, and social security and Medicare taxes. Independent contractors provide a low-cost way of getting skilled work. They can be a source of special skills that are needed only occasionally or a way to support your business in those time when extra help is needed.

From a state and local tax perspective, clearly an employee in a state creates nexus in that state. But what if your company has an independent contractor. They can’t create the dreaded nexus, right? Unfortunately, depending on what the independent contractor is doing then that is not necessarily the case. In most jurisdictions, the independent contractor will usually create nexus in the state in which they reside or where they perform services.

In general, services provided by an independent contractor to your company do not create nexus. However, if the services are provided ON BEHALF OF your company, then nexus is likely. (For example, perhaps you engage an independent contractor in another state to install or service the product you sell at a client site.) Once nexus occurs, then your company may have income tax, sales tax, and franchise tax requirements. Even further, if the independent contractor is misclassified, then the company may have employment tax issues as well.

From a business perspective, if you’re a company and you use independent contractors, it’s always a good business practice to review your worker’s processes regularly to ensure that an employer/employee relationship is not created. From a state tax perspective, be cognizant of whether or not you have independent contractors performing services. Do you have independent contractors installing or inspecting installation jobs after the sale? Do you have a trucking company that brings goods into another state? If so, then you should likely consider doing a nexus study to see where exposure exists. Or if you are planning on selling your business, a voluntary disclosure or a nexus study could be a good fit for you as well.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at JerryDonnini@FloridaSalesTax.com or call 954-642-9390.

Other recent “Sales Tax Nexus” posts by Jerry Donnini:

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