Are They An Independent Contractor Or An Employee?
Do you have an independent contractor or are you considering hiring one?
If so, this lengthy article is worth the read!
Companies can avoid significant wage, tax, and other obligations by engaging independent contractors instead of employees. Using independent contractors can result in considerable cost savings and increased workforce flexibility.
Individuals often choose to become independent contractors because they desire greater control over their work environment and schedules. Others prefer more variety in their day-to-day work and more control over the methods they use to accomplish that work. In addition, some workers are interested in operating their own business and using their entrepreneurial skills to more directly impact their earning capacity.
While it can be advantageous for both parties, independent contractor classification involves careful consideration of several factors, application of multiple standards, and exposure to liability in several areas, including potential liability for unpaid overtime compensation, taxes, and employee benefits.
Simply referring to a worker as an independent contractor, even in a written agreement, does not prevent legal challenges to that classification by workers, the Department of Labor (DOL), the Internal Revenue Service (IRS), or state and local authorities. Misclassification audits, investigations, and lawsuits are increasingly common and can result in steep costs and penalties.
What Is an Independent Contractor?
An independent contractor is a worker who contracts with individuals or entities to provide services in exchange for compensation. An independent contractor does not work regularly for any single company and is not an employee. An independent contractor typically:
• Charges fees for service.
• Is engaged only for the term required to perform an identified service or task.
• Retains control over the method and manner of work.
• Retains economic independence.
• Is responsible for paying their income, social security, and Medicare taxes.
• Is not protected by most federal, state, or local laws intended to protect employees.
An entity contracting with an independent contractor generally has the right to control only the end result of the project and not how the independent contractor accomplishes it. Companies that engage independent contractors must issue them a Form 1099 for income-reporting purposes. The contracting company has no obligation to provide benefits to the independent contractor or withhold or pay employment taxes on the contractor’s behalf (except when backup withholding is required, in the case of a missing or incorrect tax identification number for the independent contractor).
In addition, independent contractors are generally free to offer their services to the public and to perform work for other clients. Independent contractors often own their own businesses and provide services according to their own terms.
What Is an Employee?
An employee, by comparison, is subject to significant oversight by a company. The company has the right to control the method and manner of the employee’s work. In addition, an employee:
• Is paid wages (which may include overtime compensation) and company-sponsored benefits.
• Is employed for a continuous period of time and performs whatever tasks the company requires.
• Pays the full amount of their income taxes and a portion of their social security and Medicare taxes, generally through the amounts their employer is obligated to withhold from their wages.
• Is economically dependent on the employer.
• Is protected by applicable federal, state, and local employment laws.
Companies cannot rely on generalizations to determine employee or independent contractor status. The classification depends on the facts of each case, and application of the appropriate independent contractor tests in your state.