12 Frequently Asked Questions About Independent Contractors
Determining whether a worker is an employee or independent contractor can be complex and is a common point of confusion among employers.
Government enforcement agencies continue to focus on worker misclassification, including whether independent contractors are classified correctly. Working with an independent contractor generally relieves employers of certain obligations related to employment taxes, minimum wage, overtime, benefits and workers’ compensation. For this reason, state and federal enforcement agencies are looking to recover back pay, overtime and benefits for misclassified workers, as well as back taxes for their governments.
Given heightened enforcement, employers need to be acutely aware of the narrowly defined criteria for independent-contractor status. However, determining whether a worker is an employee or independent contractor can be complex and is a common point of confusion among employers. The following are some of the most frequently asked questions related to independent contractor classifications.
1. What are independent contractors?
In general, independent contractors are self-employed individuals in an independent trade, business or profession who offer their services to the general public under a contract or agreement. However, whether workers are independent contractors or employees under federal or state law depends on the facts in each case. In general, the determination is based on the degree of control the business has over a worker. The more control the business has over the individual, the more likely that individual will be perceived as an employee and not an independent contractor.
2. What are the penalties for misclassifying employees as independent contractors?
Federal and state enforcement agencies have made worker misclassification a top priority, and the consequences for misclassification can be significant. In addition to owing back pay, overtime and benefits to a misclassified worker, the employer may be ordered to pay back taxes, interest and fines. In some states, employers that intentionally misclassify a worker may also face criminal charges or stop-work orders.
3. How do I determine if a worker is an employee or an independent contractor?
A worker is presumed to be an employee unless he or she meets specific criteria; the specific test used depends on the purpose. For example, the Internal Revenue Service uses a Common Law Test to determine whether a worker is an employee for federal tax purposes. There are also other tests, including those used by the U.S. Department of Labor, the Equal Employment Opportunity Commission and several states. One should carefully review each test and consult legal counsel before classifying any individual as an independent contractor.
4. What is the IRS Common Law Test?
The IRS Common Law Test is the most commonly used test for determining independent contractor status. It has three parts that examine factors related to behavioral control, financial control and the type of relationship between the business and the worker, which is covered next.
5. What factors are considered when looking at behavioral control?
The first part of the IRS test examines whether there is a right to direct or control how the worker does the work, including the type of instruction given, the degree of instruction, evaluation systems (measuring how the work is performed rather than the end result is an indication of a employee/employer relationship) and training.
6. What factors are considered when considering financial control?
The second part of the IRS test looks at factors that show whether the company has a right to direct or control the financial and business aspects of a worker’s job, such as how the business pays the worker and the extent to which the worker has unreimbursed business expenses. When compared with employees, independent contractors are more likely to have unreimbursed business expenses, make significant investments in tools and facilities, make their services available to other businesses, realize a profit or loss and are more likely to be paid a flat fee or on a “time and materials” basis.
7. What factors are considered when looking at the nature of the relationship between worker and employer?
The third part of the IRS test considers facts that show how the worker and the business perceive their relationship, such as whether there is a written contract describing the relationship, the extent to which the worker is available to perform services for other businesses, the permanency of the relationship, the extent to which services performed by the worker are a key aspect of the business, and whether or not the worker is entitled to employee-type benefits.
8. Is there a set number of IRS factors that must be met to classify a worker as an independent contractor?
No. Under the IRS test, there is no set number of factors that must be met, and no one factor stands alone in making the determination. An employer must weigh all factors and take into account other applicable tests when determining whether an individual is an employee or an independent contractor.
9. Can a worker waive his or her right to be considered an employee and opt to be a contractor?
No, a worker cannot waive his or her employee status through a contract or otherwise. The specific criteria of the independent-contractor tests must be satisfied to classify a worker as an independent contractor. Otherwise, the worker is an employee, no matter what a contract or waivers say.
10. How long can an independent contractor work for me?
While there is no specific limit, a continuing relationship between the business and worker is considered an indication of an employer/employee relationship. Since the relationship can change over time, if and when contracts are renewed or extended, be sure to review whether the worker still qualifies as an independent contractor.
When in doubt, seek legal counsel or err on the side of caution and classify the worker as an employee.
11. What are my options if I have applied the tests and I am still unsure whether a worker is an employee or independent contractor?
When in doubt, seek legal counsel or err on the side of caution and classify the worker as an employee. You may also request an official determination from the IRS using Form SS-8. Keep in mind, however, that it ordinarily takes at least six months to get an IRS determination.
12. What are the paperwork requirements for independent contractors?
If you’ve made the determination that the person you’re paying is a bona fide independent contractor, you should have the contractor complete IRS Form W-9. This form can be used to request the correct name and Taxpayer Identification Number of the worker. Additionally if you paid a bona fide independent contractor $600 or more for services provided during the year, you need to complete IRS Form 1099. A copy of the Form 1099 must be provided to the independent contractor and IRS. n
Rebecca Morris is the content development manager for ADP HR411. Whether it’s HR, payroll or benefits, ADP provides the services and insights that let you focus on what matters: growing your franchise. For more information, contact ADP Vice President, Franchises & Affiliations Deepak Mehta at 973-712-3367 or firstname.lastname@example.org.
Disclaimer: This content provides practical information concerning the subject matter covered and is provided with the understanding that ADP is not rendering legal advice or other professional services. ADP does not give legal advice as part of its services. While every effort is made to provide current information, the law changes regularly and laws may vary depending on the state or municipality. This material is made available for informational purposes only and is not a substitute for legal advice or your professional judgment. You should review applicable law in your jurisdiction and consult experienced counsel for legal advice.