Updated November 3, 2020:

Understanding contract labor rules is crucial if you are an employer or an independent contractor. There are many very important rules that both have to adhere to in order to remain safe in the eyes of the law.

Introduction to Independent Contractors

An independent contractor is one who works under a contract to perform different tasks for a business. These contract workers are also known as freelancers and are quickly growing in number. A freelance worker is paid piecemeal, or as a job is completed. They are often paid less than an employee and are not eligible for benefits.

Hiring an independent contractor is perfectly fine if you prefer not to hire direct employees. However, as a business, you will be required to follow very strict guidelines. An independent contractor is not an employee and cannot be treated as such.

Difference Between an Independent Contractor and an Employee

There are a variety of independent contractors. Some of them can be the owner of a business. He or she could have a small company that provides different services, such as IT services. Others are professional contractors, such as a lawyer, doctor, or dentist.

It can get complicated when a business decides to contract duties to independent contractors that are normally done by employees. The contractor will be paid one lump sum. The contractor will have to take care of his or her own taxes, as they will not be withheld from the lump sum payment.

Independent contractors are subject to self-employment taxes. A contractor is considered self-employed in the eyes of the law and is not covered by federal employment laws.

If you hire independent contractors, their wages can be deducted from your income. You will have to provide contractors with a 1099-MISC and the IRS Form 1096 listing how much he or she was paid. You will need to work closely with your accountant to make sure you are following the law with regard to write-offs and the like.

Independent contractors have to keep up with estimated tax payments. There are a number of deductions that contractors can utilize, including the following:

  • Home office
  • Travel expenses
  • Car expenses when it is used for business purposes
  • Health insurance premiums
  • Contributions to retirement accounts
  • Property and equipment depreciation
  • Educational expenses

An employer will withhold federal and state taxes from employees. Social Security and Medicare taxes are also withheld. An employer will contribute half of the employee’s Medicare and Social Security taxes. The independent contractor will have to pay the taxes in full. An independent contractor is also ineligible for any workers’ compensation or unemployment benefits.

Independent contractors are not provided protection from employment discrimination or entitled FMLA leave via the Family Medical Leave Act. If you are in need of time off for an illness or disability for either yourself or a family member, you will not be granted leave or job protection. You can simply leave a project, or be removed by the person who contracted you.

There are some tradeoffs to being an independent contractor. The freedom to take a certain amount and type of job you want is a big bonus.

According to the IRS, you are not considered an independent contractor if you do anything that is controlled by an employer, regarding how a job will be done, or what will be done. If the employer requires you to be at a certain location doing a certain job for 40 hours per week, this makes you an employee instead of a contractor in the eyes of the IRS.

If you are an employer and someone is getting a regular paycheck, that person is an employee. A contractor will work within a specific contract and provide an invoice when the job is finished.

An independent contractor is your status if:

  • You supply your own materials or equipment.
  • The employer does not give you all the things you need to do the job.
  • If you can be let go from a project at the discretion of the employer.
  • If you can choose to go to work or not without the worry of being fired as an employee.
  • If you control how many hours you work each week.
  • If the job is permanent or temporary.

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