More small businesses are using independent contractors than ever, preferring outside consultants and freelancers over hiring full-time or part-time employees. Independent contractors bring employers scheduling flexibility, fewer tax obligations and straightforward working relationships. Show
However, before entering into an independent contractor arrangement, employers must understand how this worker classification differs from that of a traditional employee and what they need to do to comply with U.S. Department of Labor (DOL) and IRS regulations. What is an independent contractor?An independent contractor is a person or business that performs services for another person or business. Both parties enter into a contract that clearly defines the contractor’s duties, pay, type of work, amount of work and more. The arrangement is more about the work than how the contractor executes the work. Independent contractors differ from traditional employees who’ve gone through a company’s hiring and onboarding process. The company pays its contractors, but contractors aren’t employees. Instead, independent contractors are self-employed (also known as a “business for self”); they can operate and work for several clients simultaneously. Companies often use independent contractors to avoid hiring staff for short-term needs. How do independent contractors and employees differ?The DOL and IRS maintain crucial definitions and rules for independent contractor status:
Here are some basics about independent contractors vs. employees. Independent contractorsIndependent contractors are self-employed; the money they make working as independent contractors is subject to self-employment tax. They supply their own work tools and must submit invoices for payment. EmployeesEmployees perform services an employer controls, including what work must be done and how it should be completed. This definition also applies to exempt employees, who have the autonomy to operate within their role as the employer sees fit if the outcome is acceptable. What matters to the DOL is whether the employer has the legal right to control the details of how and when services are performed. Here are some quick facts about employees:
ComplyRight’s chart below shows the stark differences between independent contractor and employee classifications. Source: ComplyRight How can you avoid misclassifying independent contractors?Misclassifying independent contractors can get employers in big trouble with the DOL and IRS. It’s critical to classify all your workers accurately. If you misclassify a worker, you could be subject to substantial penalties and fines. In the past, the IRS used a 20-factor test to help businesses determine if someone was an independent contractor or employee. The agency has now compressed these 20 factors into three categories:
While the IRS no longer uses the 20-factor test to determine someone’s worker classification, it’s still helpful to look at the factors it evaluates. (Note that no specific number of factors determines a classification.)
What are typical examples of independent contractors?There are many routine examples of independent contracting functions or roles within business today, including the following:
What are best practices for working with independent contractors?When working with independent contractors, use these strategies to keep yourself out of hot water with the IRS while ensuring the work meets your needs:
What are the pros and cons of using independent contractors?Working with independent contractors has many upsides for businesses. However, there are also some downsides to consider. Pros
Cons
Contractors are a smart business solution – if you get it rightHiring an independent contractor can be a cost-effective way to meet nonrecurring business needs or accomplish tasks a full-time employee can’t. If you’re careful to follow IRS and DOL rules, an independent contractor can be an excellent addition to your business team. Ross Mudrick contributed to the writing and reporting in this article. What are five traits of an independent contractor?The 5 personality traits that make a successful contractor. Confidence. To become a successful contractor - it's important to have confidence in your own abilities. ... . Personable. ... . Flexibility. ... . Problem Solving. ... . Honesty.. What are some attributes that may distinguish an employee from an independent contractor?An employee is on a company's payroll and receives wages and benefits in exchange for following the organization's guidelines and remaining loyal. A contractor is an independent worker who has autonomy and flexibility but does not receive benefits such as health insurance and paid time off.
|