Questions To Ask To Determine A Persons Employment Status
Here are questions you can ask to help you determine whether someone is an employee or an independent contractor.
- What was the intent of the parties? Did you intend to enter into a contract of service or did you intend to enter into a contract for services ?
- Is he or she given instructions, supervised, controlled or subject to discipline?
- Is he or she told what to do, how to do it and when to do it?
- Does the person have to do the work himself or herself, or could that person have it completed by someone else?
- Does the person perform work normally or previously performed by an employee?
- Does the person use tools, space, supplies and equipment that you own?
- Is the workers income always the difference between the cost of providing the service and the price charged for the service? If so, the worker may not be an employee.
- Is the person at risk of losing money if the cost of doing a job is more than the price charged for it? If not, this would indicate an employment relationship.
- Does the person receive regular payments of regular amounts, regardless or customer satisfaction or customer payment? This would indicate an employment relationship.
Should I Be An Employee Or An Independent Contractor
Self Employment Tax Form – Schedule SE
I received a call with an unusual question. The caller was finishing his PhD in a scientific field that is highly sought after in the biochemical industry. He wants to determine his career path early, and was referred to me with this question: Im trying to decide whether to seek a job as an employee or become an independent contractor. My skill is valuable, and Im simply trying to determine how to apply it.
Usually Im being asked the employee versus independentcontractor question as part of a tax strategy. An employer wants to have a key resource classified as an independent contractor in order to avoid employment taxes and benefit costs. The question is what distinguishes the two for tax purposes. Here, the caller is truly trying to understand the distinction for career purposes. His question is really, Do I want to work for myself or someone else?
Lets take a big picture look at this inquiry. We can break the employee versus independent contractor question into categories. While I recognize that some employees are highly independent, and some independent contractors have structured tasks for a single contractor, generalizations can be made. What I seek to do is highlight typical circumstances distinguishing the employed from the self-employed.
So, how did I conclude my conversation with the scientist trying to map out his career? I suggested this very basic model for consideration.
Is It Better To Be A 1099 Or W2 Employee
1099 contractors have a lot more freedom than their W2 peers, and thanks to a 2017 corporate tax bill, they are allowed significant additional tax deductions from what is called a 20% pass-through deduction. However, they often receive fewer benefits and have far more tenuous employment status with their organization.
Employee V Independent Contractor: Whats The Verdict
This depends on what youre looking for. Usually, an independent contractor is the way to go if you need a particular skill or service for a specific, isolated project or if the work isnt related to your core business. For example, if you need someone to clean your office once a week or a customer has requested that you provide a particular type of cabinet in the kitchen youre installing. But if youre looking for someone who can assist you with the part of the job that you do every day, an employee is probably the better way to go.
Why Might An Employer Prefer To Hire An Individual As An Independent Contractor Rather Than As An Employee
Hiring independent contractors over employees is a bold choice made by an employer. Not only is the employer hiring someone who does not have a guaranteed commitment toward the company, but the employer is also passing on the opportunity of having a loyal member of the company who shares the same goals as them. Although the employee or contractor may perform the same tasks and deliver the same results, there should be a firm reason why an employer prefers hiring an independent contractor. Among these reasons are:
- Reduction of labor costs. Add-on costs are spent only on employees and not on independent contractors.
- Reduction of supplies and office cost. Companies are not responsible for the equipment, supplies, and offices of independent contractors.
- Reduction of liability. Employers are also not necessarily responsible for injuries that independent contractors may sustain while performing their companyâs responsibilities.
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Classifying Contractors Vs Employees
An employee is a permanent member of your company who must be treated in accordance with federal and state labor and wage laws. An independent contractor operates under a separate business name from your company and performs job functions for you on a temporary basis.
The U.S. Internal Revenue Service has pretty strict guidelines about when someone must be classified as an employee or an independent contractor, which are primarily based on the degree of control and independence the worker retains. The three categories the IRS uses to classify these are behavior, financing and relationship type.
To determine the degree of control your worker has, ask yourself the following questions:
Although the main differentiator of worker status comes down to control, the dividing line between an employee and an independent contractor is not always that simple. For example, you may also have to consider the type of job function being performed in comparison to your specific business trade. Andy Contiguglia, business risk management consultant and owner of Contiguglia Law Firm, provided an example of how two different job types may be classified for a web design company.
Another thing to consider when classifying workers is how their classifications might change over time. Contiguglia said that, if the IRS or Department of Labor reclassifies your workers from contractors to employees, you could be subject to serious fines and payment of past-due taxes and benefits.
Is It Better To Hire Employees Or Independent Contractors
There is no definite answer to this question because the truth is, deciding on hiring whichever category of a worker depends entirely on the contingencies faced by your company. As with every other business-related decision, there are pros and cons to hiring an employee or hiring an independent contractor. If you aim for long-term goals, then it may be advised that you hire employees who share the common vision as you and are far more loyal than independent contractors. However, if you are more into achieving short-term goals, then hiring independent contractors may be the better choice for you, considering they require fewer expenses.
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How Us Companies Harm Workers By Making Them Independent Contractors
Being classified as either an employee or an independent contractor can determine whether workers in the United States have access to reliable pay, benefits, and protection from discrimination. Intense fights are cropping up across the country as companies try to argue that their workers are just independent contractors and do not qualify for many protections under U.S. labor law, while workers and some courts say the opposite, that some workers are actually employees. Many gig economy companies, such as Uber Technologies Inc., base their business models around misclassifying their workers as self-employed. Billions of dollars in worker pay is at stake.
Economists and policymakers alike rightfully praise individual entrepreneurs who strike out on their own, and they encourage companies to embrace innovation. However, the vast majority of self-employed independent contractors are nothing like the legendary small businessperson engaged in launching a newfangled product or service. Instead, large companies have found that they can use independent contracting or self-employment status in U.S. labor law to lower workers pay and benefits, while maintaining significant control over how those workers perform their jobs.
What Determines Whether An Individual Is An Employee Or An Independent Contractor
An individuals status as an employee or an independent contractor is determined by a number of factors, including the nature of the work relationship, the degree of control over the work, and the amount of independence in the work.
Misclassifying information, which has grown in importance in recent years as an enforcement priority for federal and state agencies, can result in significant fines and penalties. An independent contractor is a service provider who works independently in a trade, business, or profession. The Internal Revenue Service Common Law Test is the most widely used test used to assess a workers status. When a worker is unsure about their status, it is best to classify them as employees. Form SS-8 can also be used by the IRS to obtain an official determination. Some states may have more stringent requirements for their state tests, making it more difficult to satisfy. An independent contractor is an option for small businesses that want to save money. Determine whether a worker is classified as an independent contractor based on all applicable federal and state tests. If the worker fails to meet these tests, he or she will be entitled to all of his or her rights and benefits.
Independent Contractors Vs Employees: Procedures That Safeguard
Here are a few things in-house counsel can do to be proactive when it comes to reducing the risks presented by engaging independent contractors:
- Prepare a policy setting out who, when, and how the company may engage independent contractors.
- Ensure all managers are trained on the policy and how to properly treat and work with independent contractors.
- Create a process where the legal department and human resources are notified when any independent contractor has been working for the company for one year or more and then evaluate the engagement to ensure the company is not treating the contractor as an employee.
- Have a standard independent contractor agreement that properly sets out the terms of any such engagement.
- Know the federal and state laws for every location where the company has employees and have experienced employment law counsel already lined up in the event there are issues or questions.
- Discuss the risks and concerns around engaging independent contractors with senior management to help ensure no one believes it is a path to avoid when hiring employees its not.
See Practical Law: State Q& A Comparison Tool Independent Contractors and Independent Contractor/Consultant Agreement
Sterling Miller, HILGERS GRABEN PLLC
Independent Contractor Earns More On Average
Freelancers and independent contractors tend to earn more than regular employees in the same business position. On average, an independent contractor will earn up to 40% more than an employee doing the same job. This is because companies do not have to pay social security tax or provide employee benefits or workers compensation when they are hiring independent contractors. Furthermore, when dealing with an independent contractor, the company does not withhold unemployment benefits or medicare. This, in turn, allows the freelancer to request higher rates and still get hired by companies.
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Do Independent Contractors Pay More Taxes Than Employees
Independent contractors are usually paid more than employees because companies are more willing to provide them bigger salaries. Hiring independent contractors will also make employers avoid the stress of entering into expensive and long-term commitments, which is usually the case when hiring employees. That said, employees pay more taxes for health benefits, unemployment compensation, Social Security taxes, Medicare taxes, and others.
Disadvantages Of Being An Independent Contractor
If you are considering being an independent contractor here are the disadvantages that may come along with it:
- Additional responsibility While there is a lot of freedom that comes with being an independent contractor, there is also a great deal of responsibility that comes with it. While employers dont need to pay taxes and social contributions, the duty thus falls on the contractor. Contractors must ensure they correctly pay their own taxes and make the relevant contributions. As a contractor you have to fulfill many roles. You are responsible for your own marketing, finances, and operations.
- Limited access to resources If a freelancer or contractor generally needs access to specific tools or resources, businesses in most cases may not reimburse the freelancer for expenses incurred. You will need to ensure that you have access to all the required tools and resources, which will be influential when determining your price.
- Limited job security Employees generally earn a stable income each month, while the same is not applicable to independent contractors. You may be extremely busy in one period, and completely free in the next. While some contractors find steady clients, others have to constantly search for work. The work may also be seasonal and that would mean that you would have to prepare in advance in order to reduce risk.
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Gain A Wide Range Of Skills
While working with many clients, independent contractors are exposed to different project requirements. Consequently, they learn new things on the job. They can try related fields and gain new skills. Eventually, independent contractors become experts with a wide range of skills. This inevitably increases their market demand and rate.
What Are The Disadvantages Of Being A 1099 Employee
Some of the disadvantages of being a 1099 employee include you must fund 100% of your Medicare and Social Security taxes, health insurance, retirement savings, as well as any tools and equipment needed for your profession.
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The Benefits Of Becoming A Contractor
There are a number of advantages to being a contractor.
Be your own boss
Contract work provides greater independence and, for many people, a greater perceived level of job security than traditional employment.
Maintain a good work/life balance
Less commuting, fewer meetings, less office politics and you can work the hours that suit you and your lifestyle best.
Earn more money
Being a contractor means you get paid for every hour of work you do, at the market rate. If your skills are in demand, your income could be high.
Test out a new field of expertise
Not sure if there’s a market for your skills? You can dip a toe into a new industry without committing yourself to a full-time job. If it doesn’t work out, you can cut your losses quickly and easily.
Start on a part-time basis
This can be appealing to young people just graduating from college, or older people who want to experiment with a second or even third career.
Test out a company
If you’re not sure a new company is offering the right full-time employment opportunity for you, suggest first working for them as an independent contractor.
If these benefits sound appealing, you might have the right mindset and skills to become a contractor.
What Happens If A Worker Is Misclassified
The consequences for misclassification vary depending on whether the misclassification is deemed intentional.
Typically, a company will required to pay back taxes, as well as fines and penalties that can be based on the number of IRS Form W-2s that the company failed to file because of the misclassification and a percentage of wages in which the company failed to withhold the proper taxes, Harman said.
In extreme cases, he said, businesses could face criminal penalties, and a worker who has been misclassified could be entitled to overtime pay for time worked in excess of 40 hours per week, as well as additional monies, such as punitive or liquidated damages if the worker is successful in a lawsuit against the company.
Foley added that, besides monetary consequences, there can also be disputes over who owns the work that was created.
Employees work is typically owned by the business, Foley said. Independent contractors work has to be signed over to the company in a separate contract.
Key takeaway: Worker misclassification can have monetary and legal repercussions.
Additional reporting by Skye Schooley. Some source interviews were conducted for a previous version of this article.
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Who Is A Best Fit For Contracting Work
An ADP Research Institute study shows that 72% of independent contractors state they chose contracting work over a traditional job. People who want the freedom and flexibility of choosing their own assignments, work hours, and clients are likely the best fit for working as an independent contractor.
Conditions some contractors may find challenging include working irregular hours and purchasing their own work equipment. Other challenges mentioned in an independent 2019 contractor study conducted by Washington States Department of Commerce include:
- Enforcing contracts
Its The Next Step Of Evolution
A recent survey by Outsized found that many business leaders are open to the idea of a âblended workforceâ to help them become more agile and efficient.
They expect that 15-30% of their future workers will be short-term or project-specific hired hands rather than full-time employees. That backs up research by McKinsey in September 2020 which found that 70% of global executives expect to use more freelancers in the future.
And if it was not enough, a 2020 survey by Forbes found that 49% of hiring managers rate access to highly skilled talent as the main reason for adopting this model. For more detailed information about this, check our blog post âUp to 30% of the future workforce will be independent contractorsâ.
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