Independent contractor

Last updated

An independent contractor is a person, business, or corporation that provides goods or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work regularly for an employer but work as required, when they may be subject to law of agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company or franchise, which they themselves own, or may work through an umbrella company.

Business Organization undertaking commercial, industrial, or professional activity

Business is the activity of making one's living or making money by producing or buying and selling products. Simply put, it is "any activity or enterprise entered into for profit. It does not mean it is a company, a corporation, partnership, or have any such formal organization, but it can range from a street peddler to General Motors."

Corporation Separate legal entity that has been incorporated through a legislative or registration process established through legislation

A corporation is an organization, usually a group of people or a company, authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration.

Service (economics) intangible offering inseparable from its creators labor, which brings utility value to their client

In economics, a service is a transaction in which no physical goods are transferred from the seller to the buyer. The benefits of such a service are held to be demonstrated by the buyer's willingness to make the exchange. Public services are those that society as a whole pays for. Using resources, skill, ingenuity, and experience, service providers benefit service consumers. Service is intangible in nature.

Contents

In the United States, any company or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service (IRS) as well as to the contractor, using Form 1099-MISC. [1] [2] This form is merely a report of the money paid; independent contractors do not have income taxes withheld like regular employees.

Tax information reporting in the United States is a requirement for organizations to report wage and non-wage payments made in the course of their trade or business to the Internal Revenue Service (IRS). This area of government reporting and corporate responsibility is continuously growing, carrying with it a large number of regulatory requirements established by the federal government and the states. There are currently more than 30 types of tax information returns required by the federal government, and they provide the primary cross-checking measure the IRS has to verify accuracy of tax returns filed by individual taxpayers.

Internal Revenue Service Revenue service of the United States federal government

The Internal Revenue Service (IRS) is the revenue service of the United States federal government. The government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue, who is appointed to a five-year term by the President of the United States. The IRS is responsible for collecting taxes and administering the Internal Revenue Code, the main body of federal statutory tax law of the United States. The duties of the IRS include providing tax assistance to taxpayers and pursuing and resolving instances of erroneous or fraudulent tax filings. The IRS has also overseen various benefits programs, and enforces portions of the Affordable Care Act.

In the United States, Form 1099-MISC is a variant of Form 1099 used to report miscellaneous income. One notable use of Form 1099-MISC is to report amounts paid by a business to a non-corporate US resident independent contractor for services. The ubiquity of the form has also led to use of the phrase "1099 workers" or "the 1099 economy" to refer to the independent contractors themselves. Other uses of Form 1099-MISC include rental income, royalties, and Native American gaming profits.

Versus employee

The distinction between independent contractor and employee is an important one in the United States, as the costs for business owners to maintain employees are significantly higher than the costs associated with hiring independent contractors, due to federal and state requirements for employers to pay FICA (Social Security and Medicare taxes) and unemployment taxes on received income for employees. [3] Likewise, employees are protected from being fired without cause, and if fired or let go for other reasons are entitled to unemployment benefits, whereas independent contractors have neither protection nor entitlement. Employees are also entitled to receive overtime pay for work performed over the 40-hour-per-week standard, whereas independent contractors may work any number of hours (including far above this standard) with no change in pay.

In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration. The original Social Security Act was signed into law by President Franklin D. Roosevelt in 1935, and the current version of the Act, as amended, encompasses several social welfare and social insurance programs.

Medicare (United States) United States single-payer national social insurance program

Medicare is a national health insurance program in the United States, begun in 1966 under the Social Security Administration (SSA) and now administered by the Centers for Medicare and Medicaid Services (CMS). It provides health insurance for Americans aged 65 and older, younger people with some disability status as determined by the Social Security Administration, as well as people with end stage renal disease and amyotrophic lateral sclerosis.

The Federal Unemployment Tax Act is a United States federal law that imposes a federal employer tax used to help fund state workforce agencies. Employers report this tax by filing an annual Form 940 with the Internal Revenue Service. In some cases, the employer is required to pay the tax in installments during the tax year.

In the early 1990s, the IRS methodically began to look for employers who were misclassifying employees as independent contractors, and has since obtained billions of dollars in Social Security back taxes. [3] Recently, worker classification initiatives have been a top priority for the IRS, the Department of Labor, and state agencies. In 2011, the IRS and the Department of Labor entered into a memorandum of understanding in an effort to jointly increase worker misclassification audits. [4]

Back taxes is a term for taxes that were not completely paid when due. Typically, these are taxes that are owed from a prior year.

A memorandum of understanding (MoU) is a type of agreement between two (bilateral) or more (multilateral) parties. It expresses a convergence of will between the parties, indicating an intended common line of action. It is often used either in cases where parties do not imply a legal commitment or in situations where the parties cannot create a legally enforceable agreement. It is a more formal alternative to a gentlemen's agreement.

The United States Supreme Court has offered the following guidelines to distinguish employees from independent contractors:

  1. The extent to which services are integral to the employer's business. Greater integration favors an employee-employer relationship.
  2. The permanence of the relationship. More established relationships favor employee status.
  3. The amount of investment in equipment. When a worker makes a significant investment in the equipment they use in working for someone else, this suggests an independent contractor relationship.
  4. The degree of control by the principal. More control favors employee-employer status.
  5. The amount of financial risk. More opportunity for profit or loss favors an independent contractor relationship.
  6. The amount of initiative, judgment or foresight in open-market competition with others required for the success of the claimed independent enterprise. Entrepreneurial and distinctive work favors an independent contractor relationship. [5]

The IRS, for federal income tax, applies a "right to control test" which considers the nature of the working relationship. [6] They highlight three general aspects of the employment arrangement:

  1. financial control
  2. behavioral control
  3. relationship between the parties

In general, their criteria parallel those of the Supreme Court in sentiment. They include guidelines such as the amount of instruction, training, integration, use of assistants, length of professional relationship, regularity of work, location of work, payment schedule, source of funds for business expenditures, right to quit, and financial risk more typically seen with each work category. In their framework, independent contractors retain control over schedule and hours worked, jobs accepted, and performance monitoring. They also can have a major investment in equipment, furnish their own supplies, provide their own insurance, repairs, and other expenses related to their business. They may also perform a unique service that is not in the normal course of business of the employer. This contrasts with employees, who usually work at the schedule required by the employer, and whose performance the employer directly supervises. Independent contractors can also work for multiple firms, and offer their services to the general public. [3]

The distinction between independent contractors and employees is not always clear, and continues to evolve. For example, some independent contractors may work for a number of different organizations throughout the year, while others retain independent contractor status although they work for the same organization the entire year. [7] Other companies, for example in the freight transport industry, specify the schedule for the independent contractor, require purchase of vehicles from the company and prohibit work for other companies. [4]

In July 2015, the U.S. Department of Labor issued new guidelines on the misclassification of employees as independent contractors. "A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of "employ" under the Act, most workers are employees under the Fair Labor Standards Act." [8] [9]

... the economic realities of the relationship, and not the label an employer gives it, are determinative. Thus, an agreement between an employer and a worker designating or labeling the worker as an independent contractor is not indicative of the economic realities of the working relationship and is not relevant to the analysis of the worker's status. [8]

Specific occupations

Examples of occupations where independent contractor arrangements are typical:

Advantages and disadvantages

Independent contracting has both benefits and drawbacks to contractors.

Advantages

Firms in the sharing economy such as Uber can gain substantial advantages via the misclassification of employees as independent contractors. [10]

Disadvantages

Independent contracting in tort

The employer of an independent contractor is generally not held vicariously liable for the tortious acts and omissions of the contractor, because the control and supervision found in an employer–employee or principal–agent relationship is lacking. However, vicarious liability will be imposed in some circumstances:

  1. where the contractor injures an invitee to the real property of the employer,
  2. the contractor is involved in an ultra-hazardous activity (one likely to cause substantial injury, such as blasting with explosives), or
  3. the employer is estopped from denying liability because he has held out the independent contractor as if he were simply an employee or agent.
  4. the employer is involved in an operation subject to obligations imposed by a public authority

Alternatives

Due to the higher expense of maintaining employees, many employers needing to transition from independent contractors to employees may find the switch difficult. There is a transitional status for employees as an alternative to independent contracting known as being a statutory employee. Statutory employees are less expensive to hire than classic employees because the employer does not have to pay unemployment tax. However, they are more expensive than independent contractors because Social Security and Medicare taxes must be paid on wages. Similarly to independent contractors, statutory employees can deduct their trade or business expenses from their W2 earnings. [3]

Dependent contractor

A growing number of workers do not neatly fit the government's categorizations of independent contractors and statutory employees, and are increasingly being classified as dependent contractors. Some of these contingent workforce—independent contractors, temporary workers, and part-time workers, who work when and for how long they want, such as those who work for such companies as Uber, Handybook, Inc., and CrowdFlower—have filed lawsuits that argue that companies that substantially control workers' work and behaviors while working (such as at Handybook, Inc.: when to knock on customers' doors vs. ring the doorbells, and how to use the customers' bathrooms) should be covered by minimum-wage and overtime rules under the Fair Labor Standards Act, as well as receive other traditional employee protections. Wilma Liebman, former chairperson of the National Labor Relations Board, has observed that Canada and Germany have such protections in place for contingent workers. UK Prime Minister David Cameron has appointed an overseer for freelance workers in that country, to determine how the government should support freelance workers. [16] [17] [18]

See also

Related Research Articles

Employment is a relationship between two parties, usually based on a contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or other entity is the employer and the other is the employee. Employees work in return for payment, which may be in the form of an hourly wage, by piecework or an annual salary, depending on the type of work an employee does or which sector they are working in. Employees in some fields or sectors may receive gratuities, bonus payment or stock options. In some types of employment, employees may receive benefits in addition to payment. Benefits can include health insurance, housing, disability insurance or use of a gym. Employment is typically governed by employment laws, regulations or legal contracts.

Temporary work situation where the employee is expected to leave the employer within a certain period of time

Temporary work or temporary employment refers to an employment situation where the working arrangement is limited to a certain period of time based on the needs of the employing organization. Temporary employees are sometimes called "contractual", "seasonal", "interim", "casual staff", "outsourcing", "freelance"; or the word may be shortened to "temps". In some instances, temporary, highly skilled professionals refer to themselves as consultants.

Payroll

A payroll is a company's list of its employees, but the term is commonly used to refer to:

Freelance, freelancer, and freelance worker, are terms commonly used for a person who is self-employed and is not necessarily committed to a particular employer long-term. Freelance workers are sometimes represented by a company or a temporary agency that resells freelance labor to clients; others work independently or use professional associations or websites to get work.

The Federal Insurance Contributions Act is a United States federal payroll contribution directed towards both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.

Self-employment is the state of working for oneself rather than an employer.

A subcontractor is an individual or in many cases a business that signs a contract to perform part or all of the obligations of another's contract.

A professional employer organization (PEO) is an outsourcing firm which provides services to small and medium sized businesses (SMBs). Typically, the PEO offering may include human resource consulting, safety and risk mitigation services, payroll processing, employer payroll tax filing, workers' compensation insurance, health benefits, employers' practice and liability insurance (EPLI), retirement vehicles, regulatory compliance assistance, workforce management technology, and training and development. The PEO enters into a contractual co-employment agreement with its clientele. Through co-employment, the PEO becomes the employer of record for tax purposes through filing payroll taxes under its own tax identification numbers.

Employee benefits non-wage compensation provided to employees in addition to normal wages or salaries

Employee benefits and benefits in kind include various types of non-wage compensation provided to employees in addition to their normal wages or salaries. Instances where an employee exchanges (cash) wages for some other form of benefit is generally referred to as a "salary packaging" or "salary exchange" arrangement. In most countries, most kinds of employee benefits are taxable to at least some degree. Examples of these benefits include: housing furnished or not, with or without free utilities; group insurance ; disability income protection; retirement benefits; daycare; tuition reimbursement; sick leave; vacation ; social security; profit sharing; employer student loan contributions; conveyancing; domestic help (servants); and other specialized benefits.

A permatemp is a temporary employee who works for an extended period for a single staffing client. The word is a portmanteau of the words permanent and temporary.

Misclassification of employees as independent contractors is the way in which the United States classifies the problem of false self-employment. It can occur with respect to tax treatment or the Fair Labor Standards Act.

Internal Revenue Service (IRS) tax forms are forms used for taxpayers and tax-exempt organizations to report financial information to the Internal Revenue Service of the United States. They are used to report income, calculate taxes to be paid to the federal government, and disclose other information as required by the Internal Revenue Code (IRC). There are over 800 various forms and schedules. Other tax forms in the United States are filed with state and local governments.

Fair Labor Standards Act of 1938 United States wage law

The Fair Labor Standards Act of 1938 29 U.S.C. § 203 (FLSA) is a United States labor law that creates the right to a minimum wage, and "time-and-a-half" overtime pay when people work over forty hours a week. It also prohibits most employment of minors in "oppressive child labor". It applies to employees engaged in interstate commerce or employed by an enterprise engaged in commerce or in the production of goods for commerce, unless the employer can claim an exemption from coverage.

Wage theft is the denial of wages or employee benefits rightfully owed to an employee. It can be conducted by employers in various ways, among them failing to pay overtime; violating minimum-wage laws; the misclassification of employees as independent contractors, illegal deductions in pay; forcing employees to work "off the clock", or simply not paying an employee at all.

In the United States, the combination of payroll taxes withheld from a household employee and the employment taxes paid by their employer are commonly referred to as the nanny tax. Under US law, any family or individual that pays a household employee more than $2,100 a year must withhold and pay Social Security and Medicare taxes, also known as FICA. The law mandates that all domestic workers, such as cooks, nannies, housekeepers and gardeners, are subject to the nanny tax. Federal unemployment insurance taxes must also be paid if the household pays any number of employees a total of $1,000 or more in a calendar quarter. State unemployment insurance taxes have the same requirement with the exceptions of California ($750), New York ($500), and Washington, D.C. ($500) have lower thresholds.

A statutory employee is an independent contractor under American common law who is treated as an employee, by statute, for purposes of tax withholdings. For a standard independent contractor, an employer cannot withhold taxes. Statutory employees are also permitted to deduct work-related expenses on IRS Schedule C instead of Schedule A in the United States tax system. As a result, they are allowed a greater tax deduction for business expenses than standard employees, as Schedule C expenses are not subject to the 2% adjusted gross income threshold as seen with Schedule A.

<i>United States v. Silk</i> United States Supreme Court case

United States v. Silk, 331 U.S. 704 (1947), was a United States Supreme Court case regarding US labor law. The case concerned the scope of protection for employees under the Social Security Act 1935.

The term H-1B-dependent employer is used by the United States Department of Labor to describe an employer who meets a particular threshold in terms of the fraction of the workforce comprising workers in H-1B status. An employer classified as H-1B-dependent needs to include additional attestations in the Labor Condition Application used for the petition of any H-1B beneficiary being offered an annual compensation of less than $60,000 and without a master's degree. The notion was introduced by the American Competitiveness and Workforce Improvement Act (ACWIA) passed in 1998 and operationalized through the United States Department of Labor's Interim Final H-1B Rule of December 20, 2000. The regulation is found in 20 CFR 655.736 in the Code of Federal Regulations.

False self-employment is a situation in which somebody registered as self-employed, a freelancer, or a temp is de facto an employee carrying out a professional activity under the authority and subordination of another company. Such false self-employment is often a way to circumvent social welfare and employment legislation, for example by avoiding employer's social security and income tax contributions. While a modern "gig economy" encourages more casual employment practices in the interests of labour flexibility, the extent to which this disguises precarious employment and denial of rights is of growing concern to authorities.

References

  1. See generally 26 U.S.C.   § 6041 and 26 C.F.R. sec. 1.6041-1.
  2. Sample form 1099-MISC
  3. 1 2 3 4 5 Brabec, Barbara (November 26, 2014). How to Maximize Schedule C Deductions & Cut Self-Employment Taxes to the BONE -. Barbara Brabec Productions. p. 107. ISBN   978-0985633318.
  4. 1 2 Koch, Matthew (June 6, 2014). "The Tax Risks of Misclassifying Employees". The National Law Review. McBrayer, McGinnis, Leslie and Kirkland, PLLC. Retrieved June 14, 2014.
  5. "Financial Control". IRS. September 13, 2017. Retrieved October 2, 2017.
  6. McConville, Timothy M. (May 20, 2014). "Don't Misclassify Workers as Independent Contractors". The National Law Review. Odin, Feldman & Pittleman, P.C. ISSN   2161-3362 . Retrieved June 14, 2014.
  7. IRS Frequently Asked Questions about form 1099-MISC
  8. 1 2 Weil, David (July 15, 2015). "The Application of the Fair Labor Standards Act's "Suffer or Permit" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors" (PDF). United States Department of Labor. Archived from the original (PDF) on July 16, 2015. Retrieved July 15, 2015.
  9. Trottman, Melanie (July 15, 2015). "Employees vs. Independent Contractors: U.S. Weighs In on Debate Over How to Classify Workers". Wall Street Journal. Retrieved July 15, 2015.
  10. Lauren Smiley (April 20, 2015). "What Strippers Can Teach Uber" (Medium.com). Retrieved April 21, 2015. Many of these companies are built with workers who are not even considered workers at all. In a twist of business logic that drives much of the sharing economy, these delivery people, drivers, and maids aren't employees – they're entrepreneurs.
  11. "U.S. Cracks Down on ‘Contractors' as a Tax Dodge" article by Steven Greenhouse in The New York Times February 17, 2010
  12. Salon - Taxes for union busting
  13. Radio New Zealand - Truck drivers to lose jobs
  14. See definition of FICA Tax Archived January 12, 2012, at the Wayback Machine .
  15. Times-Standard - Logger deaths highlight safety concerns; contractors exempt from state guidelines
  16. DeSantis, Joe (February 4, 2015). "The Dependent Contractor?". American Society of Employers.
  17. Weber, Lauren (January 28, 2015). "What if There Were a New Type of Worker? Dependent Contractor (On-Demand Workers Need Job Protections, Some Argue)". Wall Street Journal.
  18. Arthurs, H. W. (1965). "The Dependent Contractor: A Study of the Legal Problems of Countervailing Power". The University of Toronto Law Journal. Published by: University of Toronto Press. 16 (1): 89–117. JSTOR   825096. Article DOI: 10.2307/825096