What is an Independent Contractor?
An independent contractor is a person or business that contracts with another person or business to perform services. Independent contractors may also be referred to as a consultant, freelancer, or subcontractor. They are generally paid by the hour or a contract fee per project.
Why Hire an Independent Contractor?
Independent contractors are hired for many reasons. Typically, independent contractors have specialized knowledge in a particular area and are hired to consult on an as-needed basis. This flexibility is a big advantage to the employer and often avoids the expenses and training that would be involved if a full-time employee were tasked with the project.
Since independent contractors are not full-time employees, they are generally cheaper to hire because the employer is not responsible for paying a salary, payroll taxes, employee benefits, and the insurances required by state law (disability and unemployment insurances in New York).
The onboarding process for an independent contractor is quick and the paperwork is minimal. Typically, the contractor will provide the client (or vice versa) with an independent contractor agreement covering the scope of the project, fees, timeline, etc. For tax purposes, the contractor will receive a 1099 if the fees for the contract exceed $600.00.
From a legal perspective, independent contractors are also less of a liability than a full-time employee because many employment laws do not apply such as minimum wage, overtime pay, union regulations, etc.
What Happens if I Misclassify an Employee as an Independent Contractor?
This can be a serious problem. Sometimes the duties and responsibilities of an independent contractor make it unclear whether or not that person is in fact independent from the employer. On the other hand, it’s not uncommon for employers to purposefully misclassify a worker to avoid paying taxes and employee benefits. This puts a business at risk for being audited by the IRS, state tax authorities, and other governmental agencies.
The U.S. Department of Labor is cracking down on this problem and in 2011 launched the Misclassification Initiative. This program has promoted the cooperation between the Department of Labor and the IRS to share information in order to reduce the incidence of misclassification of employees and to improve compliance with federal labor laws.
How to Classify an Employee vs. Independent Contractor
Whether or not a worker is an employee or independent contractor depends on the facts of the situation. A case-by-case analysis is employed, however the main factor is always the extent of control that the employer has over the worker. For more guidance on this topic the New York Department of labor has published independent contractor guidelines here and the IRS has federal guidelines available here. For more information feel free to contact us.