Typically, you`ll need to withhold income taxes, withhold and pay Taxes on Social Security and Medicare, and pay unemployment tax on wages paid to an employee. You usually don`t have to withhold or pay taxes on payments to independent contractors. Unlike employees, independent contractors are usually also allowed to work for other businesses and may incur a profit or loss like any other small business. In an attempt to interpret the provisions of the Fair Labour Standards Act and to distinguish between the status of an employee and that of an independent contractor, some federal courts and agencies have developed the « economic realities test. » The IRS and many states have adopted common law principles to define an independent contractor. These rules mainly focus on the level of control an employer has over a service or product, i.e. whether the employer actually defines what is done and how it is achieved. Harman noted that employees are hired to perform certain work according to the employer`s instructions. Independent contractors, on the other hand, typically receive a mission or project to work on without being fully controlled by the company on when and how to do it, he said. A company can pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company deducts income tax, social security and health insurance from the wages paid. For the independent contractor, the company does not withhold taxes.
Labour and labour laws also do not apply to independent contractors. The integration and training process is also very different. Because entrepreneurs are supposed to focus on a specific project, they often only get the information they need to accomplish that task, according to Kimberly Schneiderman, senior director of practice development at RiseSmart. Full-time employees, she said, need lengthy onboarding processes to understand the intricacies of team dynamics, corporate culture and overall goals. « Most people think that the only difference between an independent contractor and an employee is how they are paid. Specifically, compensation for independent contractors is not subject to withholdings such as federal income taxes and FICA taxes, » said attorney Michael C. Harman. « In addition to compensation, independent contractors have more autonomy in the work they do. » As you can see, there are many reasons why employers prefer independent contractors to employees. Therefore, it is not surprising that some employees are wrongly classified as independent contractors. Courts and federal agencies use several tests to determine whether an independent contractor is actually an employee, and the standards differ depending on the labor rights sought. Examples of workers who are often misclassified include truck drivers, construction workers, bicycle couriers, and high-tech engineers. Are the commercial aspects of the employee`s work controlled by the payer? These include when the employee is paid, reimbursement of expenses, offer of paid leave or sick leave, who provides tools or supplies, etc.
Payroll employees can expect their employer to deliver all of these things. However, independent contractors are expected to do these details themselves. Each state also has tests to determine a person`s status under workers` compensation and unemployment insurance laws. The economic realities test used in most states makes it more difficult to classify an employee as an independent contractor because, in addition to the degree of control test, it takes into account the degree to which the employee is economically dependent on the company. Country-specific information can be obtained from state personnel agencies visit the Disclaimer page. An employee, on the other hand, depends on the company for a regular income, renounces elements of control and independence, is entitled to certain benefits and works within the limits of the workplace. For each of your employees, you must file a Form W-2 and withhold and pay certain taxes and benefits. Although the independent contractor is his own boss, the work remains within the definitions of an oral or written contract and meets certain requirements. There are federal and state laws that govern whether a person is an employee or an independent contractor.
Therefore, your type of employment impacts your rights as a member of the U.S. workforce. It examines the employee`s dependence on the company for which he or she works. If a person receives a large portion of their salary from that company, there is a chance that that person will qualify as an employee. In general, if you are an independent contractor, you work for yourself and the company is your client. You are responsible for the payment of your labor taxes and are not entitled to the social benefits provided by the Company or required by the State (including medical and/or dental services). You should also carefully track your income for tax reporting purposes, as your clients do not withhold federal and state taxes from your salary. It can be easy to fall into the trap of treating them like an employee, but it can put you at risk of misclassification. The main difference lies in the degree of control: if the employer dictates all the conditions and does so consistently over time, the person is likely to be an employee. In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the opportunity to reclassify their employees as employees with partial federal labour tax relief. Certain factors define an employee as an independent contractor in all cases: not relying on the company as the sole source of income, working at his or her own pace as defined in an agreement, not being entitled to the benefits provided by the employer, and maintaining a certain degree of control and independence.
The IRS will look at certain factors to see if an employee is self-employed or should be an employee of a company. These factors, according to attorney Christy L. Foley, but are not limited to: Independent contractors, on the other hand, have the freedom to decide when, how and how much exactly they will work. If you have clients who don`t know the boundaries between contractors and employees, you can take steps to ensure you are treated fairly and appropriately. Let`s say you run a coffee shop and pay a flat rate to a graphic designer to create new menus and business cards for your coffee shop over a period of time. In this case, you will most likely hire an independent contractor. « The work of the employees usually belongs to the company; The work of independent contractors must be entrusted to the company in a separate contract, » Foley said. Foley said the paperwork also differs in that contract workers don`t always provide reports to the companies they work for like an employee would. The company`s paperwork is also different because the company does not have to file withholding tax documents for a contract worker.
Common law principles further define the status of an independent contractor through the indemnification method. If a person is on an employer`s payroll and receives a stable salary, it is clear that the person is an employee and not an independent contractor. Since independent contractors are their own business unit, a client cannot determine their hours of work. They are solely responsible for the execution of the employment agreement – when they work and the hours they keep are entirely up to them. Does the company control or have the right to control what the employee does and how the employee does his or her job? For payroll employees, the answer is yes. For independent contractors, the answer is « no » unless otherwise specified in the independent contractor agreement. For more information on joining the CWA as an independent contractor, please click here to contact a union organizer. On the other hand, if you hire a barista 20 hours a week and pay him an hourly wage to shoot an espresso in your coffee shop, you`re almost certainly hiring an employee. Ownership of contract work automatically belongs to the independent contractor if the work does not fall into one of the nine categories listed above and the contractor has not signed any agreement to the contrary. However, an employer may become an owner if the independent contractor agreement expressly gives the employer the rights to the work performed under or under the agreement. It is extremely important to read an independent contractor contract very carefully before signing to ensure that you do not assign your rights to valuable intellectual property.
The Voluntary Classification Settlement Program (CSIP) is an optional program that provides taxpayers with the opportunity to reclassify their employees as employees for future tax periods for labour tax purposes, partially exempting eligible taxpayers who agree to prospectively treat their employees (or a class or group of workers) as employees. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply for the VCSP by completing Form 8952, Voluntary Classification Claim, and enter into a final agreement with the IRS. Independent contractors can be sole proprietors or have a registered business. They have built these companies around specialized services they offer – it is not uncommon for freelancers to have a business name and work for multiple clients. If an employer has no authority over how a party performs its work, but simply gives an overview of the claims, the relationship between the parties is that of the hiring party/independent contractor. It is important that business owners correctly determine whether the people providing the services are employees or independent contractors. .
