Pennsylvania Independent Contractor Law
Pennsylvania independent contractor law defines who is considered an employee and who works on a freelance basis.3 min read
2. Characteristics of an Independent Contractor
3. PA State Laws for Employees and Independent Contractors
4. Federal Safe Harbors
5. PA Form 1099
Updated October 28, 2020:
Pennsylvania independent contractor law defines who is considered an employee and who works on a freelance basis. In general, an employee works for a company directly and must follow the employer's instructions when it comes to the performance and timing of work tasks. Independent contractors, on the other hand, can work whenever and wherever they choose as long as they provide the work as promised by the contracted deadline.
Benefits of Employing Independent Contractors
Many employers choose to hire independent contractors instead of employees for these reasons:
- No need to pay unemployment compensation
- No liability for negligent acts of contractors
- Easy to discharge
According to Pennsylvania courts, the employment relationship is defined by employer control over how the specified work is completed. By contrast, the independent contractor retains control over how to perform his or her work. This distinction exists regardless of what the employer titles the person in question, how he or she is paid, and whether or not provision has been made for income tax or Social Security. Many employers can save money by paying a slightly higher salary to an independent contractor than they would to an employee.
Characteristics of an Independent Contractor
The courts use several factors to determine whether an individual is in control of his or her work. These include:
- Responsibility for only the result, not the process
- Contract terms
- Nature of the occupation
- Level and type of skill required
- Engagement in a distinct occupation
- Which party supplies the necessary equipment
- Whether the person is paid by project or in certain intervals
- Whether taxes have been deducted from the person's pay
- If on-the-job training was provided by the employer
- If the employer demanded specific requirements
To ensure the courts will consider the person an independent contractor, this should be clearly spelled out in the work agreement. The independent contractor should receive general work guidelines but not those that control the manner in which the work is performed. The day-to-day supervision of the contractor should be avoided. He or she should receive a set project-based fee rather than an hourly wage. Have the contractor supply his or her own equipment and vehicle. Do not presume the right to keep the individual from doing work for other companies or withhold taxes and other fees from his or her pay.
PA State Laws for Employees and Independent Contractors
PA requires that an independent contractor provide services that are not unique to the employer's business, sets his or her own work hours, offers his or her services to the public at large, and is employed under a contract. Independent contractors do not hire or supervise assistants on behalf of the employer, work at the employer's premises, follow a work sequence set by an employer, receive training from the employer, or submit regular reports.
The independent contractor must also sustain an independent business, which means he or she has the necessary tools to do the work, profits or loses money from performing the services, has a separate business location, and has performed the same or similar services for another business in the past. Pennsylvania also requires independent contractors to maintain at least $50,000 in liability insurance.
Federal Safe Harbors
A taxpayer who qualifies for a federal safe harbor will not have this status contested by Pennsylvania. Federal safe harbor laws prevent certain individuals from being reclassified as employees rather than as independent contractors for federal employment tax purposes. This includes those who:
- Have consistently held independent contractor status since 1977
- Have consistently received 1099s from employers since 1978
- Can be justified as an independent contractor by a court ruling, IRS audit, or industry practice
However, this law does not apply to designers, engineers, computer programmers, and other technical personnel.
PA Form 1099
Employers must file 1099-MISC forms for all independent contractors who provide business services as well as for payments made under a Pennsylvania-based oil and gas lease. These forms must be filed with the Pennsylvania Department of Revenue the same day as the electronic Form 1099 filing is due. This document reports the entire amount the employer paid the contractor during that calendar year.
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