What
Is an Independent Contractor?
Independent contractors work for themselves — they are
treated as if they are running their own business. Thus, you are
not the employer of an independent contractor, and you aren't
liable for payroll taxes or benefits for them, nor are they
protected by workers' compensation or most labor laws.
Independent contractors control the performance of the work
based on their experience, special license, or special education
or training required for the job. In most cases, you tell them
the outlines of the project that needs to be done and the due
date, and they determine how to accomplish it, on their own
schedule. The independent contractor provides the knowledge,
experience, and labor to perform the job or provides other
individuals to perform the job contracted. Independent
contractors are usually paid based on their results (i.e., a
flat rate per job, or a per-unit-completed rate) rather than the
time they put in.
Independent contractor under the Internal Revenue Code.
The IRS frowns on the use of independent contractors, in part
because such workers are responsible for paying their own
payroll taxes and it's much more difficult to make sure they're
doing so.
Generally speaking, for
tax purposes the key question is the degree of control you
can exercise over the worker. The worker will be treated as an
employee if the company has the right to determine not just what
the employee does, but when, where, or how he or she does it.
The IRS has a 20-factor test that it uses to determine whether
an employee is an independent contractor or an employee in
disguise. The factors can carry different weights, depending on
the factual situation. Generally speaking, if the worker would
be considered an employee under at least 10 of the factors, you
should treat him or her as an employee.
If in doubt, look at IRS Form SS-8, which is the form used by
the IRS to determine individual status for purposes of income
and employment taxes.
Independent contractors under the Fair Labor Standards Act
(FLSA). The FLSA is another important federal law governing
your treatment of workers. Unfortunately, it has its own
definition of independent contractor that is slightly different
from the IRS's definition. In order to be truly sure that you're
safe in treating workers as independent, you must meet both
definitions.
Under the FLSA, independent contractors are not
"employees" under the federal FLSA and are, therefore,
not entitled to minimum wage and overtime protections. There are
six factors for determining whether a worker is an
"employee" under the FLSA, as opposed to an
independent contractor:
- the degree of the alleged employer's right to control the
manner in which the work is performed
- the alleged employee's opportunity for profit or loss
depending upon managerial skill
- the alleged employee's investment in equipment or
materials required for the work
- whether the service rendered requires special skills
- the degree of permanence of the working relationship
- whether the service rendered by the worker is an integral
part of the alleged employer's business
No single factor is more important than the others in
determining independent contractor status. When the issue comes
up in courts, the judge must consider whether, as a matter of
economic reality, a worker is dependent on the business to which
a service is rendered for continued work. The greater the
dependence, the more likely the worker will be found to be an
employee.
It's very important to realize that having a worker sign an
independent contractor agreement will not automatically create
such status if the worker does not meet the requirements of the
tests described above.
Workers employed by an independent contractor are not
employees of the organization which the contractor is serving
— they are employees of the contractor.
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When working with independent contractors, it
is a good idea to develop a written contract
relinquishing the right to control and
specifying that the worker will not be treated
as an employee for federal tax purposes.
Employers should also file informational returns
(1099 MISCs) for their independent contractors
and comply with state laws for workers'
compensation and unemployment compensation.
A contract with an independent contractor
should also include terms on terminating the
relationship. Because independent contractors
are not employees, "termination" would
be done according to the provisions of the
contract. Since a firm and an independent
contractor have a contract relationship, not an
employment relationship, any misunderstandings
about job performance or termination of the
relationship are governed by contract law.
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