What makes an Independent Contractor?
An independent contractor is an individual who provides some sort of service for another person but differs from an employee. Independent contractors, unlike employees, do not work regularly for an employer and are not subject to the same control that an employee is. It is important to know whether an individual is an independent contractor or not for tax purposes.
An individual may be an independent contractor if he or she does the following:
- Sets his or her own schedule
- Decides which jobs or tasks to perform and in what sequence
- Holds an office wherever he or she chooses and does not always work on an employer’s premises
- Possesses all tools, equipment, and assets necessary to perform the service independent of the person for whom the service is provided
To provide an example, suppose a general contractor has three carpenters working for him under his control. They are building a house according to a schedule that he set for them and following all of his instructions regarding the work. They are all employees. The general contractor then hires a fourth carpenter, paying him $10,000 to wire the house they are building. He is told he can wire the house whenever, as long as the task is completed within 30 days. Since the fourth carpenter is setting his own schedule and is not subject to the control of the employer during the completion of his task (wiring the house), he is considered an independent contractor.
It’s not always easy to determine whether an individual is an independent contractor or an employee. Employers sometimes tell employees that they are independent contractors or have them sign independent contractor agreements when they should in fact be considered employees instead. The United States Supreme Court has established guidelines to help distinguish between the two but an employment attorney can help you make that determination and explain your rights and responsibilities.
United States Supreme Court Guidelines to Consider
- The extent to which services are integral to the employer’s business
- The permanence of the relationship
- The amount of investment in equipment
- The degree of control by the principal
- The amount of financial risk
- The amount of initiative, judgment or foresight in open-market competition with others required for the success of the claimed independent enterprise
Factors suggesting an employer-employee relationship
- Greater integration of services into the employer’s business
- A more permanent, established relationship between the individual and the employer
- More control by the person for whom the service is provided
Factors suggesting an independent contractor relationship
- Greater investment by an individual in the equipment needed to provide the services
- More opportunity for profit or loss
- Entrepreneurial work
When it comes time to file taxes, an employee files a W-2 Form whereas an independent contractor files a 1099 Form. Employers are responsible for withholding income taxes, Social Security and Medicare taxes for their employees but not for independent contractors. If an employer misclassifies an employee as an independent contractor without a reasonable basis, that employer may be held liable for employment taxes that were not withheld. It would be to your advantage to contact an employment attorney if you are an individual who may have been misclassified or if you are an employer who is unsure how to classify an individual.