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Pros and Cons of Being an Independent Contractor | NESTA

Pros and Cons of Being an Independent Contractor

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An independent contractor is defined by the method of compensation. If an individual receives a steady paycheck and is on an employer’s payroll, definitely the person is an employee and not an independent contractor. Independent contractors submit invoices for their work rather than working for a specific salary, discussed during initial contract negotiations. The bill rates for contractors vary depending on the job they are looking for since they may have a standard billing rate for their services.

Laws cover employees

Based on employment laws, an employee is covered by several state and federal labor and employment laws, unlike an independent contractor who is not protected by these laws. For instance, the hiring business usually completes Form W-9 to request the Taxpayer Identification Number (TIN), legal name, and payments made to independent contractors by completing form 1099-MISC.

Independent contractors are business owners

Unlike employees, independent contractors may have an incorporated business or maybe sole proprietors. Again, it is more likely that a person is an employee when work is considered integral to the company.  On the other hand, work status that is nonintegral and is temporary might suggest independent contractor status. Employers are advised not to treat independent contractors as employees but as business-to-business partners to avoid the risk of misclassification.

Unlike employees, independent contractors have specialized skill

Independent contractors bring specialized expertise to a project or task while employees receive some training for them to perform their duties. An application form handled by human resources is completed by a potential employee who gets a job offer after approval. On the other hand, a prospective contractor interacts with the department or a person who wants a certain task or services completed. Most independent contractors show a high level of specialization in their industry because they offer a specialized skill that needs education, exceptional training, and certification.

Unlike employees, independent contractors pay their own taxes

Another thing that determines if one is an employee or an independent contractor is the employer’s tax liability. Employers have to pay disability premiums or workers compensation to a state insurance fund, social security tax, and federal and state unemployment tax when a worker is an employee, unlike when a worker is an independent contractor where these payments are not made.

Employees only work for one company unlike independent contractors who can work with many different clients

Independent contractors have to market and sell their services since they run their own business. It means that they can work for other clients even if they have a long-term contract with another client. Independent contractors may partner with other partner consultants, subcontractors, and their employees to assist them complete work tasks.

Independent contractors often work on specific projects

Employees’ job incorporates many tasks and duties while independent contractors are responsible for performing the services outlined in a contract. A contract outlines what is expected for a worker and gives details on payment terms, time frames and how work should be done.

Independent contractors work without oversight and set their own hours

An independent contractor supplies his or her tools, materials, and equipment, unlike an employee who is provided with the stuff by his or her employer. Naturally, employees get instructional oversight from a manager, and it is difficult to determine how an independent contractor works since they provide all the necessary equipment and tools for the job. A contract stipulates all the specialized requirements needed for a given situation. It is hard for a client to determine the working hours of an independent contractor because they own a business entity and are responsible for establishing and fulfilling the work agreement.

Also, three criteria have been set by the IRS that helps to differentiate between employees and independent workers.

Behavioral Control

A worker is likely to be an employee if an employer controls and directs how work is to, be conducted, working hours, and gives the tools and equipment for work to be done. On the other hand, a contractor sets his or her working hours with little or no supervision and training.

Financial Control

The factor depends on whether a worker can acquire a loss or profit and whether the worker can work for others at the same time.  A worker who does not partake in company losses and gains is probably an employee and also one who is restricted from working for others.

Type of Relationship

An independent contractor has a specific contract, but this would indicate an employment relationship if the worker is entitled to benefits. Also, employee work is directly related to the company’s core work.

Taxes, Benefits, and Payments

For an independent contractor in the US and other countries, he or she has to pay for the Medicare tax, social security, and unemployment tax since the hiring company does not pay these taxes for the contractor. Also, employment taxes and income taxes are not withheld by the hiring company for the independent contractor. Employees have to follow the law by paying these taxes to the state and the federal government. An employee can be classified as an employee under one law or in another country. Still, an independent contractor is classified as an IC under one law or even in one state.

IRS Expectations

The IRS expects that every worker to be classified as either an independent contractor or as an employee since auditors review the worker’s status based on the nature of the relationship, financial controls, and behavioral controls. An application for a determination on the status of a worker is required for the hiring company or the worker to state if the worker is an employee or an independent contractor. Every employer is expected to send contractors a form that shows total annual earnings. An independent contractor must furnish a valid taxpayer ID number such as Employer ID Number and Security Number to the hiring company. The hiring company is needed to deduct backup withholding from the contractor’s payment if the taxpayer ID is incorrect or invalid. Independent contractors must pay self-employment taxes since they are business owners.

Department of Labor Regulations

Independent contractors are not subject to the Fair Labor Standards Act (FLSA) regulations since they lack an employment relationship with the hiring business referred to as “merely contractual.” Therefore, they are not subject to record-keeping, youth employment, overtime, and minimum wage as per the FLSA provides. All employees and independent workers must, therefore, review to determine if they meet the FLSA criteria of workers. The Department of Labor discourses Supreme Court Decisions, which states that no rule can decide if one is an employee or an independent contractor for FLSA purposes. The FLSA laws do not apply to independent contractors such as Workers Compensation, Unemployment Compensation, Occupational Safety and Health Act (OSHA), and Americans with Disabilities Act (ADA) since they are independent business owners.

State Regulations

Worker’s status as either an employee or an independent contractor is essential because most US states and other countries have regulations about the worker’s status. Fines and penalties are imposed on a business that does not correctly classify a worker for wages status and state employment. Most states and nations are tightening fines and penalties regulations to make it hard to call a worker an independent contractor.

ABC Test

An ABC Test is used by employers to guide them in determining if a worker is considered an employee or an independent contractor in the government’s eyes. Since the law is evolving, various states have adopted the ABC test as law. In contrast, others use it only in specified situations, for instance, when determining if one is legible for unemployment insurance.

The Right to Control Test

The right to control test is used to govern whether one is an employee or an independent contractor. For instance, if an individual lacks power over how a party achieves his or her work but needs an outline, this association is termed as that of an independent contractor but if the way work has to be done is controlled by the hiring party, the association is that of an employee.

Economic Realities Test

Some federal and court agencies have come up with the “economic realities test” an attempt to discern between independent contractors’ status and employees and interpret provisions of the Fair Labor Standards Act. There are high chances that a person qualifies as an employee is that the individual receives a significant portion of the payment from the business. The test also features things such as disbursement of social security levies and reimbursements, the determination of the parties, the essential nature of the work, and the level of expertise.

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