A misclassification of independent contractors can put employers in great trouble with the DOL and IRS. The IRS has strict definitions for determining whether an employee is an employee or an independent contractor. It is crucial for your company to accurately classify all your employees. If you misclassify an employee, you can face heavy penalties and fines. An independent contractor is a neutral person, i.e. a consultant, lawyer, accountant, engineer or other holder of a professional qualification who provides services either to the client/client or to a third party on behalf of the client, in accordance with the terms of the contract between the contractor and the client. They are paid freelance. In other words, an independent contractor contract may have all the necessary requirements to classify the relationship as such, but some characteristics may suggest that the relationship is an employer-employee relationship. Maybe you`ve never thought about the difference between an employee and an independent contractor (also known as a «consultant» or «gig worker»). In many ways, there seems to be no difference. Often, independent contractors and employees work side by side in the same company and even do the same or similar work. Key takeaways: Freelance copywriters, graphic designers, real estate agents, and some IT professionals are examples of independent contractors.
The common denominator is that they have autonomy, even if they can work with a larger network, team or agency. The Department of Labor (DOL) and the Internal Revenue Service (IRS) maintain important definitions and rules for independent contractor status. The general rule of the IRS is that a person is considered an independent contractor if the payer of the services can only control the outcome of the work, not necessarily how it is completed. The independent contractor completes the IRS Form W-9 and an employee completes the IRS W-4 tax form. Independent contractors may have a standard billing rate for their services, or their rate may vary depending on the type of work you are looking for. Be sure to discuss how and when you want the contractor to bill you for the completed work and how and when you will pay for it after receiving an invoice. If you are an independent contractor with questions about your status, contact the Ministry of Labour`s disclaimer page. On the other hand, if the worker sets his own hours and decides how and when to perform the work, it could mean being an independent contractor. Just to confuse things, there is another possible status for employees called a statutory (or non-employee) employee. A statutory employee is a cross between an employee and an independent contractor; They are treated as employees outside the business, but they are treated as employees for labour tax purposes and as an independent contractor for income tax purposes.
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 law also does not apply to independent contractors. If you`re not 100% sure if your employees should be classified as employees or contractors, consider them as three «tests» you can apply to your relationship: 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. What the IRS calls the «permanence» of your relationship also matters. Independent contractors are usually hired on a short-term basis to do a certain amount of work. If you`re hiring someone on a long-term basis and expect them to work for you indefinitely, it`s probably an employee.
The Internal Revenue Service reminds small businesses of the importance of understanding and correctly applying the rules for classifying an employee as an employee or independent contractor. For federal labour tax purposes, a company must examine the relationship between it and the employee. The IRS Small Business and Self-Employed Tax Center on the IRS website provides useful resources. 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. It is important to determine whether an employee is an independent contractor or an employee, as it determines whether payroll taxes (income taxes and FICA taxes) are withheld from the person`s payment. You must deduct payroll taxes from employee compensation, but you do not withhold taxes on payments to independent contractors. When the self-employed have so much independence, you may be wondering why employers would hire them instead of an employee.
For employers, the benefits of hiring an independent contractor include: To get this message across in a simple way, this graph from ComplyRight shows the striking differences between the classifications of the independent contractor and employees. But as the IRS explains, there is no single «magic» factor that makes the worker an employee or an independent contractor. Unlike employees, independent contractors are generally allowed to work for other businesses and, like any other small business, can make profits or losses. Unlike traditional employees, whose work can include a variety of tasks and tasks, independent contractors are only responsible for providing the services described in a contract or scope of services (SOW). If you have any questions about employee classification or the difference between an employee and an independent contractor, it is best to contact a highly qualified labor lawyer. Have you been wrongly classified as an independent contractor? It can sometimes be difficult to know if you are really an independent contractor or a bona fide employee. If you have been misclassified, you have legal options. Talk to an employment lawyer today. It is important to distinguish between employees and independent contractors. The status of someone who works in your company makes a difference in how you pay them and how they pay taxes. The IRS Small Business and Self-Employed Tax Center provides a variety of resources for small businesses as well as independent independent contractors.
A final factor that the CRA uses to distinguish between employees and the self-employed is whether the employee can outsource work or hire assistants. This is mainly due to the fact that suppliers or hiring assistants can influence the risk of loss or profit opportunities. If the worker is an employee, he cannot hire helpers or assistants. .