In many industries, independent contractors are seen as a cost-effective and flexible solution to various workforce needs. As a result, there is a growing demand for independent contractors across a wide range of industries. An independent contractor is a person or business that performs services for another person or business.
Companies often use independent contractors to avoid hiring staff for short-term needs. 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. Consequently, it is critically important that in-house counsel take steps to ensure the company is engaging independent contractors in the right manner. Also, they should do this in partnership with the human resources department. Hiring someone to complete that small project you’ve needed done for ages? If they’re working as an independent contractor, rather than as an employee, make sure to protect your business with an independent contractor agreement.
Employment Tax Obligations
An employee is someone who works for a company in exchange for wages and other benefits. Employees are protected by labor laws, and they are expected to work according to the company’s rules and regulations. An independent contractor, on the other hand, is responsible for paying their own taxes. Instead, they are expected to set aside funds throughout the year to pay those..
Having a good start to an employment relationship and making a positive first impression on a new hire is essential to establishing a productive, successful, and professional workplace.
- As the business landscape continues to evolve, independent contractors are playing an increasingly important role.
- Hiring an independent contractor can be a cost-effective way to meet nonrecurring business needs or accomplish tasks a full-time employee can’t.
- Employees are compensated on an hourly or salaried basis and are paid on a fixed recurring pay period.
- The company could be liable for employment taxes, back wages (including overtime), unemployment insurance claims, workers’ compensation claims, violations of the FMLA, claims involving benefits, and more.
- For example, if you are an independent contractor and you received $600 or more from a company during the year, the company will send you a 1099-MISC form.
Employees are often offered benefits by their employers, such as health insurance, retirement plans, paid vacation time, and sick days; contractors are not. Employees are also incentivized to perform well with raises, commissions, or bonuses. There are many ways in-house counsel can demonstrate their value to the company. Being proactive about employment law issues, especially issues involving the proper classification of independent contractors, is near the top of the list.
With Practical Law, you are only minutes away from finding up-to-date and useful answers, forms, practice notes, and checklists about all the company’s employment law questions. “I usually see it where someone wants to save as much money as possible, and [the company] works people 50, 60, 70 hours a week and won’t pay overtime because they’ve misclassified [the people],” says Miklas. Hiring 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. Any worker who earns a fixed salary or wage to work regularly can usually be classified as an employee.
The Ultimate Independent Contractor vs Employee Checklist will help you with that. Twenty years ago, the use of independent contractors (or, freelancers) by established businesses was not that common. This has changed dramatically, especially over the past five to ten years as the “gig economy” has taken off and employers are relying more and more on independent contractors instead of employees. While such use can provide a lot of benefits, it also presents a lot of risks and small business lawyers are at the forefront of helping companies mitigate these risks. Fortunately, Practical Law provides a lot of resources to aid in-house lawyers in this responsibility. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements.
Checklist For Determining Whether You Are an Independent Contractor Or An Employee:
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. Make sure you know exactly what you require from a worker and how much you can invest in them before hiring anyone. If you need a full-time worker to help run the business and are willing to spend the time and resources, hire an employee.
To determine whether a person is an employee or an independent contractor, the company weighs factors to identify the degree of control it has in the relationship with the person. Sometimes it’s thought that an independent contractor is exempt from taxes, but that’s not the case. According to the IRS, ICs are accountable for paying their own Social Security and Medicare taxes, as well as any federal and state income taxes.
This is because many agencies have work-sharing agreements with each other. The U.S. Department of Labor, for example, has a work-sharing agreement with the Florida Department of Revenue. If one is investigating you and finds evidence of wrongdoing, they’ll notify the other. “As part of that,” says Miklas, “they’ll make a referral of a complaint, and then they’ll coordinate their investigations and even cooperate with criminal investigations.”
Independent contractors vs. employees: The risks
While hiring independent contractors can save the business money on payroll, taxes and benefits. It is important to make sure that the employees you hire classify as IC and actually meet the legal criteria as such. Harman noted that employees are hired to perform specific work at the employer’s direction. On the other hand, independent contractors are typically given a job or project to work on without the company controlling when and how they do it, he said. Hiring a contract worker rather than a full-time employee could save your business money; after all, you won’t have to pay for a contractor’s health insurance, 401(k) matches, vacation time or other benefits. However, choosing this option also comes with limitations and potential risks.
For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. Nowadays, whether a worker is legally classified as an “employee” or an “independent contractor” determines whether or not he or she is entitled to any labor-law or employment-law rights. This includes the right to a minimum wage, healthcare insurance, overtime compensation, unemployment and employment benefits, as well as workers’ compensation. Using independent contractors can help minimize employee-related costs, such as payroll taxes, benefits, overtime, and workers’ comp premiums. While it may be tempting to classify some of your employees as independent contractors, with the growing risk of penalties, you’ll want to make sure your business is doing it right.
Hiring employees can be more expensive than hiring contractors due to the cost of training, benefit packages, and expectation of raises and bonuses. But employees are better equipped to take on additional responsibilities and have more flexibility to help your business succeed. Contractors are typically paid by the hour or project and do not require these other costs. Instead of focusing on long-term loyalty, as they would for someone with employee status, many businesses prioritize a contractor’s niche expertise.
Before you decide which type of worker to use for a given role, it is important to understand the differences between contractors and employees and the consequences for misclassifying workers. One of the most significant differences between independent contractors and employees is how they are taxed. When you are an employee, your employer withholds taxes from your paycheck. These tariffs include Social Security and Health Insurance, as well as federal and state income tax. 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.
If you misclassify a worker, you could be subject to substantial penalties and fines. An independent contractor is any self-employed individual hired to provide services on a temporary or on-demand basis. Depending on your business needs and other factors like taxes, benefits, and worker supervision, one option may make more sense than the other. Learn how to evaluate these variables and determine whether you should hire an employee or a contractor.
Contractors can fill your business needs for more flexible, low-supervision projects. A noncompete agreement may seem like a great way to protect your company from competition by independent contractors, but there are can be legal challenges. The IRS will review the facts and circumstances and officially determine the worker’s status.
To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See Publication 1976, Section 530 Employment Tax Relief RequirementsPDF, for more information.
The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination. If you are an independent contractor with questions about your status, contact the Department of Labor.
Independent contractors differ from traditional employees who’ve gone through a company’s hiring and onboarding process. Instead, independent contractors are self-employed (also known as a “business for self”); they can operate and work for several clients simultaneously. If you want to hire short-term help, decide on the best contractor for each project based on skill and expertise. If you want to hire employees, find individuals to fill a specific role, and decide what the position pays and how a person will perform their job. How can you hire and manage both employees and contractors within a business? Delegate tasks and divide up work according to skill sets so that each group has something they can handle well.
If you provide the tools and training and have expectations for when, how, and where someone works—that’s an employee. Business owners have more control over where, when, and how their employees perform tasks. If you desire more worker supervision and project oversight, hire employees.