Many employers utilize the services of independent contractors. But what are they? Are they entrepreneurs or employees?
However, independent contractors are not employees and are treated differently. Failing to know the differences can get an employer in legal trouble.
There are a few things that every employer should know.
No Insurance
Insurance should not be in an employer’s vocabulary when it comes to independent contractors. Employers are not required to provide benefits for contractors. Further, they are not covered under workers’ compensation. More information is available at habermaninsurance.com. It’s not unusual for contractors to file workers’ comp claims after an injury. The company may have to hire a lawyer to prove the contractor is not an employee.
Finances
Hirers must pay employees a set salary or pay them by the hour. Further, employees may be entitled to overtime. Federal and state income tax must be withheld from employees’ earnings. Additionally, employees must pay FICA taxes (Medicare and Social Security.) The business is also required to pay FICA for each employee. There are those who don’t know that employers pay unemployment taxes for employees. This is where the money comes from when employees lose their jobs.
Many employers get into trouble in this area. They treat workers as contractors to avoid paying taxes. None of the employee-related withholdings and benefits apply to independent contractors. Independent Contractors should pay self-employment taxes for themselves. Likewise, they must pay income taxes on what they earn.
Related: Essential Tips for Effectively Managing Contractors
Establish The Relationship
Independent contractors should have a contract that establishes their status. The contract lets the IRS and others know what role the contractor plays. This agreement resolves a lot of disputes before they happen. The contract should state the job description and how much the contractor will be paid. For example, there’s a business located in a building with lots of stained glass. Several stained glass panels were broken in a recent storm. The company learns they need a stained glass artist. The artist is an independent contractor hired to repair the glass.
Behavioral Control
The hiring firm cannot tell the artist how to repair the glass. Independent contractors are in charge of their own work. Indeed, the employer has no control over when or how they work. If an employer directs work, tells a hire when to work and how to work, the worker is an employee. The control issue is a key test to prove someone is an employee. Workers who set their own hours and are self-directed are independent contractors. Further, independent contractors supply their own equipment and use very little that belongs to the company. For instance, glass artists use very specialized tools and bring them to each job. Unlike employees, independent contractors don’t have to be trained like other employees. Contractors simply perform a service the hirer needs.
Financial Control
Employers don’t have control over how many companies independent contractors work for. On the other hand, employees usually have non-compete clauses. Further, contractors can be let go at any time. They don’t have to give them a reason. However, employees must be given a written separation notice. Additionally, employees may file for unemployment benefits, independent contractors cannot.
Many hirers rely on independent contractors in their businesses. However, the government does not want workers mislabeled. They’re either employees or contractors. Make sure you have a written contract with the contractor. It will prevent lots of problems in the future.
