Across the US there are still organizations who shy away from hiring independent contractors and flexible workers because of legal complexity and risks, but this goes against the trend as tens of thousands of companies are correctly following the rules, and benefit from hiring independent contractors.
This apprehension by some businesses is fuelled by the recent crackdown by the IRS, the Department of Labor, as well as state workforce agencies.
As a result, some organizations have been scrutinized for hiring independent contractors instead of hiring them as permanent employees, whether intentionally or not.
To manage independent contractors properly, organizations must clearly understand the challenges that the classification of independent contractors represents and must take the appropriate steps to protect themselves.
The Fair Labor Standards Act (FLSA) has greatly expanded the definitions of both who is an employee, and who is an employer. According to the January 2016 administrator’s interpretation, the FLSA now defines employment in the broadest of terms, including “to suffer or permit to work”.
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
Independent contractors are self-employed, and they have specific tax obligations, as described at the Self-Employed Tax Center.
An independent contractor is an employee if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if they are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
If an employer-employee relationship exists (regardless of what the relationship is called), an independent contractor is an employee and their earnings are generally not subject to Self-Employment Tax, but they will be taxed as an employee and may be subject to FICA (Social Security tax and Medicare) and income tax withholding.
It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.
For more information on determining whether an independent contractor is an employee, refer to the IRS website - Independent Contractors or Employees.
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