The 20 factors serve only as a guideline. n. a person or business which performs services for another person or entity under a contract between them, with the terms spelled out such as duties, pay, the amount and type of work and other matters. Management costs that ordinarily go toward training and overseeing large numbers of employees decrease when independent contractors do the work. However, as sole proprietors, independent contractors do not necessarily pay taxes on their gross earnings. Although not protected by law to the extent of an employee, an independent contractor has far greater control over elements such as work hours and work methods. 2002. protects employees from discrimination on the basis of race, sex, religion, and national origin; the Age Discrimination in Employment Act (20 U.S.C.A. What matters is that the employer has the legal right to control the details of how the services are performed. 4th ed. Unlike most employees, an independent contractor may opt to work at night or on weekends, leaving weekdays free. Independent contractors often work for employers who are physically far removed from their location. As such, they must be ready to compete on the global market for work. A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job. Berkeley, Calif.: Nolo. Hiring Independent Contractors: The Employers' Legal Guide. Each factor's degree of importance varies depending on the occupation and the facts involved in a particular case. Independent contractors have more personal freedom and more control over their work, but more responsibility, too. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. 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Employment Law; Labor Law; Master and Servant. Gaithersburg, Md. An independent contractor must be able to determine when and where work is performed, be able to work for others, provide own equipment, and other factors which are indicative of true independence. In contrast, independent contractors must provide benefits for themselves, including paying both the employee and employer portions of Social Security and Medicare payments, among other expenses. Investopedia uses cookies to provide you with a great user experience. The status of independent contractor carries with it many tax ramifications. ——. § 623) protects employees from age discrimination; the Fair Labor Standards Act (29 U.S.C.A. They must report all their income and expenses on Schedule C of Form 1040 or Schedule E if they have profits or losses from rental properties. Generally, under Common Law, the hiring party is not responsible for the Negligence of an independent contractor. Taking the route of being an independent contractor can be very rewarding. Page Last Reviewed or Updated: 09-Nov-2020, Request for Taxpayer Identification Number (TIN) and Certification, Employers engaged in a trade or business who pay compensation. For one thing, an employer need not provide an independent contractor with vacation time, Pension, insurance, or other costly benefits. The hiring party may be liable when, owing to its failure to exercise reasonable care to retain a competent and careful contractor, a third party is physically harmed. And by hiring independent contractors, an employer enjoys the greater ease and flexibility to expand and contract the workforce as demand rises and falls. A self-employed person is an independent contractor or sole proprietor who reports income earned from self-employment. That's because the Internal Revenue Service has only two distinctions: an independent contractor or an employee. Applicable business expenses can reduce their overall tax obligation. Some statutes contain their own definitions. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. Treasury Department. Independent Contractor (Self-Employed) or Employee? § 152(3)) protects employees and union members from unfair bargaining practices; Title VII of the Civil Rights Act of 1964 (42 U.S.C.A. Some independent contractors may also have to pay state sales taxes, depending on the product they are producing. This working relationship is a flexible one that provides benefits to both the worker and the employer. 2d 581 [1992]). In return for this control over work specifics, the owner commits to provide the employee with several benefits. Independent contractors have become increasingly prevalent in the rise of what has been dubbed “the gig economy.”. Berkeley, Calif.: Nolo.Nunnallee, Walter H. 1992. And because compliance often comes at great expense, employers can significantly reduce their liability and increase their profit margin by hiring independent contractors rather than employees. If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax. 1999. Also, independent contractors must pay estimated taxes each quarter, whereas employees generally have taxes withheld from their paychecks by their employer. To find out what your tax obligations are, visit the Self-Employed Tax Center. In addition, the entity is not required to provide the contractor with employment benefits, such as health insurance, that they might otherwise be required to provide were the contractor an employee. An independent contractor is distinguished from an employee, who works regularly for an employer. "Checklist for Determining Independent Contractor Status." Some say that because independent contractors benefit directly from their hard work, the quality of their work may be higher than it is for full-time employees who might be less motivated. A statutory employee is an independent contractor that is treated as an employee for tax withholding purposes if they meet certain conditions. "Legal Challenges in Using Independent Contractors." A self-employed individual does not work for a specific employer who pays them a consistent salary or wage. The other party, in turn, enjoys mainly profit-related advantages by hiring an independent contractor instead of an employee. 3d ed. Ringquist, Neil A. Known collectively as the 20-factor test, the enumerated criteria generally fall within three categories: control (whether the employer or the worker has control over the work performed), organization (whether the worker is integrated into the business), and economic realities (whether the worker directly benefits from his or her labor). As of 2019 independent contractors pay 12.4% in Social Security contributions and 2.9% in Medicare payments on the first $132,900 of their net income, plus 2.9% on their net income in excess of $132,900. There are differences between an independent contractor and an employee and each type of work has its pros and cons. : Aspen Press. Chicago: CCH. Washington, D.C.: U.S. Government Printing Office. Corporate Counsel's Quarterly 17 (October). "Why Congress Needs to Fix the Employee/Independent Contractor Tax Rules." "Resolving the Independent Contractor Dispute for the Future." If you are an independent contractor, you are self-employed. Pacynski, Rick A. Being an independent contractor has downsides, as they have no access to unemployment insurance or workers’ compensation payments. None of these laws protect independent contractors. Statutory Employees: What You Need to Know, Challenges for Self-Employed Finance Professionals, the rise of what has been dubbed “the gig economy.”, Being an independent contractor has downsides. Hiring employees? Decisions such as whether to work for one person or several, whether to work a little or a lot, whether to accept or reject an undesirable work project, and how much money to charge are made by the independent contractor. These include matching Social Security and Medicare contributions, providing the tools required to complete the project, the potential of employer-sponsored retirement plans such as a 401(k) or IRA, and giving the worker access to a workplace. The common-law doctrine of Respondeat Superior holds an employer liable for the negligent acts of its employee.

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