Independent Contractor Basics: Everything You Need to Know
Knowing independent contractor basics is important when your business will need to contract work from people who are not regular employees.3 min read
Knowing independent contractor basics is important when your business will need to contract work from people who are not regular employees. An independent contract spells out this work arrangement. The commitment level and requirements of independent contracts are often less stringent than those in employer-employee agreements.
Contract work lasts for a specific time frame sometimes weeks or months. This time frame can also change, becoming longer or shorter than originally planned. Employers often use contract workers when they need additional work done in a short time period and don't want the expense or difficulty of adding new employees. Contracted workers may start as short-term help and transition to employees as your business grows. Individuals often choose to work as independent contractors when they are between jobs to fill in gaps on their resume and make additional income.
Factors Determining the Status of an Independent Contractor
There are six determining factors when defining independent contractors:
- The ability to control how they perform their jobs
- Working for multiple employers
- The ability to set their own hours
- Possession of tools to complete the job
- Receiving payment for the contracted job
- Not subject to at-will firing
Agencies Dealing With Independent Contractors
There are various agencies that can determine the status of an independent contractor and set the guidelines that they need to follow. Agencies that handle independent contractors include:
- Internal Revenue Service (IRS)
- Immigration and Naturalization Service
- Employment Development Department
- Department of Labor
- State-Specific Labor Commission
- Workers' Compensation
Savings From Hiring an Independent Contractor
Many employers hire independent contractors due to the fact that it helps to save them money in a number of areas. Employing independent contractors helps a company save on:
- Employment taxes
- Health insurance
- Affordable Care Act (ACA) compliance
- Federal minimum wage and overtime costs
- Lunch and break times
- Unemployment insurance
- Occupational Safety and Health Administration (OSHA) training and requirements
- Workers' compensation
Independent Contractor v. Employee
An employer is a person who employs 15 or more employs for more than 20 calendar weeks in the current or previous years. An employee is a person in the employment of the company.
An independent contractor does not work for an employer. They have the flexibility with work structure, hours, and the ability to work with multiple employers at the same time.
While contractors are not under the IRS guidelines in the United States, the employer must comply with the IRS definition and regulations of independent contractors that work for them.
Contractors are responsible for providing all of the tools and equipment needed for jobs and have the option of working from:
- The offices of the companies for which they are contracting
- Their homes
- Their own offices or businesses
As an independent contractor, you are responsible for paying self-employment taxes, which will cover the employer portion of social security and Medicare. Aside from the requirement to pay self-employment tax, the independent contractor must also fall under the rules with what the IRS and local government constitutes as contract employment. Contact an attorney or your local government office to make sure you are in compliance.
There are situations in which an employee may wish to be considered an independent contractor for a specific job. Unfortunately, this is not the employee's call. Below are situations in which an independent contractor relationship cannot be formed. Such situations include:
- An employee simply wanting to be treated as one
- Having an invalid signed written contract
- An employee that is on call or works a sporadic schedule
- An employee that receives only commissions for wages
- An employee that is in a capacity to have no supervision
When it comes to federal taxes, the independent contractor is subject to common law rules. The federal government will use three categories to determine the status of a worker. These categories include:
- Behavioral control - This involves the amount of control a company has over an individual's work output and training.
- Financial control - This involves whether or not the business has financial control over the business aspect of the job the worker is hired to do.
- Relationship between the parties - This involves how the relationship between the worker and employer operates.
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