Independent contractors are common in many industries. Within these industries, there is a high likelihood that businesses may believe some of their workers are independent contractors when they are not.
Also, employees who are performing services on a part-time, temporary, or probationary basis are sometimes thought to be independent contractors.
If you’re an employer and you treat someone as an employee or an independent contractor, the answer affects your bottom line. An employer will pay a percentage of an employee’s gross earnings toward taxes and entitlements such as workers compensation, Social Security, unemployment insurance, and varied retirement and health plans. Some businesses seek to eliminate these obligations and taxes to reduce business expenses.
Unfortunately, it can become much more costly to the business owner when a government auditor converts workers from independent contractors to employee status.
An independent contractor is a person or business entity which
1. is free from another’s right to direct and control;
2. is responsible to the customer only for the contracted result of the work, not the manner or method used to accomplish the work;
3. controls how the service is provided, who provides it, and the means of accomplishing it;
4. sets their own prices for goods, fees for service;
5. terminates one contract while not terminating the business;
6. terminates one contract while not creating an unemployment situation;
7. has customers and prospective customers as a result of advertising and being known by the public as a going business;
8. provides goods and/or services to a public of their own choosing.
Here are some examples to consider:
|Free from direction and control||Means and manner of work are controlled by employer|
|Does tasks in own way||Does tasks the employer’s way|
|Has necessary skills and training to complete job||Trained by employer to perform job|
|Has an assumed business name||Works under the employer’s assumed business name|
|Has a business location||Works at employer’s business location|
|Performs services for multiple customers||Works for one employer, may serve that employer’s customers|
|Sets own hours||Works hours set by employer|
|Determines own price for contracted services||Accepts wage, salary, or commission determined by the employer|
|Not eligible for employee benefits||May be covered by minimum wage, overtime, safety, unemployment, and workers’ comp|
|Directly affected by business profit or loss||Not directly affected by employer’s profit or loss|
|Owns equipment and tools used to complete job||Employer provides and controls equipment and tools|
|Purchases materials and supplies needed to do job||Employer purchases materials and supplies|
|Personally liable for errors and/or accidents||Employer liable for employee errors and/or accidents|
|Files self-employment taxes.
Receives a Form 1099-MISC
|Does not file self-employment taxes.
Receives a Form W-2 from employer
|Has right to hire and fire workers||Is hired and/or fired by employer|
|Must legally complete each contract||May quit working for an employer at any time|
These examples are meant to be guidelines only. If you need more information than presented here, let us know and we’ll put you in touch with a tax auditor to give you further guidance.