Working With Independent Contractors: What You Need to Know

Engaging independent contractors can help businesses take on a variety of projects without the need to hire additional full-time employees. But there are rules and regulations limiting the use of independent contractors. Make sure you understand the guidelines for determining employee or independent contractor status in order to remain compliant.

What You Need to Know About Working With Independent Contractors

When considering the benefits and drawbacks of working with independent contractors, it is important to understand the fluidity of the U.S. labor market. Independent contractors provide a level of flexibility and autonomy not found with full-time employees, opening up opportunities that may not have been available to your business otherwise. With more and more workers taking on freelancing and contractor roles across the country, businesses may be able to access the skills they need quickly.

However, businesses need to ensure that everyone working for them is established and classified as an “independent contractor.” Legal standards and labor standards enforce how workers are classified. If a worker does not meet the government’s definition of an independent contractor, the employer may be on the hook for additional taxes, fines, and other liabilities.

Classifying Workers

To qualify as an independent contractor, a worker must be free from direction and control in how they perform their services and must not be treated as an employee. The reality, though, is more complex since many factors determine someone’s status, including the total amount of control over the worker’s activities, how work is performed, the number of hours worked, the existence of a written contract, and on-site facilities.

Other factors that help establish an individual’s status as an independent contractor include:

• Proof of self-employment in other engagements
• Submission of a federal form 1099 instead of a W-2
• Invoice for payment received for services rendered
• Evidence that the worker provides the same or similar services for other businesses
• Provision of own equipment, materials, and tools necessary to perform the services
• The ability to hire assistants
• Payment based on a flat fee or project length
• Legal liability insurance and workers’ compensation insurance

Benefits of Hiring Independent Contractors

Engaging independent contractors helps businesses benefit in many ways:

• Cost savings: Businesses are not responsible for payroll taxes, benefits, and other workplace-related costs associated with full-time employees.
• Flexible workforce: Businesses can easily scale up or down based on needs by engaging independent contractors instead of sending out full-time help.
• Expertise: Businesses can hire on-demand talent, finding the skillset or experience needed for specific tasks.
• Tax advantages: Businesses have the advantages of deducting expenses related to engaging independent contractors.

By understanding their legal obligations and taking advantage of the benefits, businesses can determinate whether engaging independent contractors makes sense for their company.

FAQs

What is the difference between an independent contractor and an employee?

The main difference between an independent contractor and an employee is that independent contractors have more autonomy in how they perform their services, while employees typically receive more direction and control from the employer. Additionally, independent contractors are paid on a project or flat-fee basis, while employees typically receive a salary or hourly wage.

What criteria determine if a worker can be classified as an independent contractor?

The primary criteria determining if a worker can be classified as an independent contractor include the degree of control over how work is performed, the extent of integration into the business or organization, the number of hours worked, the existence of a written contract, and use of on-site facilities.

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