The biggest risk in dealing with the self-employed is the risk of recharacterization. It arises when the tax or labor inspectorate suspects that the customer’s relations with the contractor are not civil law relations but labor relations. This can result in heavy fines for the company.

If the relationship is properly formalized, the risks will be significantly reduced. In this article we will tell you what factors to pay attention to in order to avoid recharacterization and avoid risks.

How the Federal Tax Service checks companies

The FTS is mainly responsible for checking companies for recharacterization. For this purpose, the tax authorities use a scoring system. It tracks several characteristics of companies at once:

  • cooperation with a customer for three or more consecutive months;
  • working with only one customer;
  • works with a former employer, although less than two years have passed since the dismissal;
  • receives payments for a long time and is paid twice a month.

The system counts the aggregate score for each company, and if the score exceeds the allowable value, the tax office sends them a notice and asks them to explain the nature of the relationship with the performer. If the company does not do this, it will have to prove in court that these relations are not labor relations.

If it is impossible to prove the contrary, the company will be obliged to pay the contractor everything that he is entitled to under labor law – payment of sick leave, vacation, additional personal income tax and insurance contributions. In addition, fines will be imposed under Part 4 of Article 5.27 of the Administrative Offenses Code of the Russian Federation, for individual entrepreneurs – from 5 to 10 thousand RUB, for companies – from 50 to 100 thousand RUB.

How to avoid risks when cooperating with the self-employed

The main points are that the self-employed do not have a salary, work schedule or vacation, they are not employees, they are not subject to company working hours and they do not work according to the established work rules.

Key risks to watch out for when dealing with and looking for the self-employed:

The presence of “labor” language in job postings

Companies often use terms typical of labor relations, such as “position” or “salary”, in advertisements seeking an employee. This can attract the attention of the tax authorities and become evidence for recharacterization of the relationship.

Hiring a former employee

If a company transfers former employees to a GPH, the Federal Tax Service may pay close attention to this – it looks like tax avoidance. The law has a separate provision for this case: the income of a former employee is not subject to NPD, and the company will have to pay taxes as when working with a physical person without status.

In this case, it is important that the company does not cooperate with the former employee as a self-employed person for 2 years after his dismissal.

Presence in contracts of terms specific to labor relations

Often, companies often include terms in their contracts with the contractor that are typical of employment contracts. For example, terms on the schedule of services, reimbursement of expenses, provision of equipment or wages.

The services of the self-employed are similar to labor duties

Employees under an employment contract have job duties and working hours. If, under a GPH contract, the company requires the contractor to perform various tasks without a final result, such a relationship may be recognized as employment.

The contractor is included in the company’s organizational structure

A contractor under a contract of employment does not have to obey the company’s employees and follow their instructions. The company can check how the contractor performs tasks or verify the quality of the service, but cannot require the contractor to follow the instructions of the client or the company’s employees in the process of providing the services.

The customer is the sole counterparty of the self-employed for a long period of time

The self-employed performs services on behalf of the same customer and does not work with other customers.

There is no itemization of services in the acts

The tax inspection can also examine the closing documents – acts, invoices. If the acts are one-line, do not reflect the volume of services rendered from period to period, they may be recognized as formal. Closing documents will become additional evidence for the tax authorities of the existence of labor relations.

A self-employed person cannot refuse to provide a service

If it is written in the contract that a self-employed person cannot refuse to perform his tasks, then such a relationship is also more like an employment relationship. Only an employee under an employment contract must perform all tasks assigned to him without the possibility of refusal.

Payment periods coincide with payroll periods

If the company pays a fixed amount over a long period of time and this amount does not depend on the quantity, quality and efficiency of services, such payments are more like a salary. The tax authorities may consider relations with such a performer to be labor relations.

In order to avoid tax risks, bringing the company to liability, labor disputes, our experts will help to develop or review existing agreements with the self-employed to identify and minimize the described risks of reclassification of such relationships as employment.