If you have been in the working world any length of time, there is no doubt you have heard the term ‘independent contractor’ used. The majority of the country’s workforce are classified as employees, rather than independent contractors. Simply put, that means that they report to a particular location(s) at a set time determined by the employer and perform work for the employer as outlined in their job description. Sometimes the delineation between roles can be a gray area, so the IRS puts forth guidelines to help figure out where you fall in the independent contractor vs. employee ruling.
Despite the guidelines from both the State of California and the IRS, there is no definitive, clear-cut answer to each situation. There are some IRS “Common-Law Rules”that make it easier to help figure out your status. If the employer can control what you will do and how it will be done, then, according to the IRS, you are classified as an employee. This rule doesn’t mean that your employer or a supervisor must hand-hold you through every step of your job. If you are experienced in your field, giving you some latitude to make decisions or close deals does not negate the fact that you are still doing what your employer has told you to do.
If you don’t enjoy reading through the legalese of the IRS website, there is a very well explained article here that puts out in relatively plain English what the rules and guidelines mean to you and your employer.
The key word in determining independent contractor status is “independent.” As an independent contractor, you cannot be directed how to perform your work or when to do it. The only control the employer has over an independent contractor is the result of the work. As an example, a home builder subcontracts out the drywall installation to an independent contractor. The home builder cannot direct the subcontractor when to do the work or how to do it. He can give a deadline for the job’s completion as part of the contract, and he can require the work to pass his own quality control standards.
Another key determinant of independent contractor status is that the contractor does not provide an essential service to the employer. If the contractor is completing a one-time project or assignment or providing a non-essential service, then they are more likely to be classified as an independent contractor. Additionally, if the independent contractor’s sole or a majority of income comes from one employer, then it is likely that the independent contractor status will be denied.
If all else fails and determination cannot be finalized by either you or the employer, the IRS (of course) has a form to help. The SS-8 can be filed by either the employer or the employee/independent contractor to have the IRS rule on the individual’s status. The IRS and state are very concerned with this issue because of the tax liabilities involved. An employer-employee relationship works under an entirely different set of rules regarding what the employer and the employee must pay in income taxes than does an employer-independent contractor relationship.
That being said, it is in your best interest to make sure you are declaring the correct status. If an independent contractor status is denied by the IRS, the financial impact can be severe when retroactive FICA and state income taxes become due. Another important difference between an employee and independent contractor status is the fact that independent contractors aren’t protected by the same laws and regulations that apply to employees.
Independent Contractors are not;
- Protected from discrimination under most Federal laws.
- Covered under the Federal Minimum Wage Law, and the employer is not obligated to pay overtime.
- Entitled to any employer-provided benefits such as health insurance, retirement plan, or life insurance.
Enlisting the help of a trusted partner with the experience dealing with employment issues is vital.
Employer/employee relationships and responsibilities are an ever-changing field, laws are continually being updated, modified and added. Most times a Human Resources Professional needs help steering clear of potential missteps.
The professionals at Aiman-Smith & Marcy are able to help you if you have any questions about your classifications.. Please contact us with any concerns or questions you may have.
