What are independent contractors?
There are times when businesses need to look in other places for certain tasks to be completed. When you need a task done and you don’t have the right skill set or tools, what should you do? The easy thing to do is hire an independent contractor. An independent contractor is a person that provides goods or services to another through a verbal agreement or a contract.
Examples of independent contractors are:
- General contractor
- Office clerk
- Snow removal
- Technical writer
- Real estate agent
Pros and Cons of being an independent contractor
A major advantage of being an independent contractor is that you are your own boss. You can choose what jobs you want to do and which ones you would rather not want. When you create something, you own exclusive copyrights to your creation (unless your contract specifies otherwise). If you are a contractor and you need certain tools to complete a job, you can purchase the tools and deduct them from your taxes as a business expense.
A disadvantage of being an independent contractor is that you may not have a regular paycheck. You are responsible for finding jobs. If you don’t have work lined up, you won’t get paid. You are responsible for business expenses and equipment that you may need. Because you work for yourself, you need to provide your own healthcare. When you get paid, taxes are not taken out of your paycheck. It is your responsibility to file your taxes and pay what you owe.
When is an independent contractor an employee?
One of the most important differences between an independent contractor and an employee is the legal aspect of their earnings. The company that an employee works for must withhold income tax, social security and Medicare from their salary. If you hire an independent contractor, you don’t need to withhold any taxes from the money you pay them. Contractors will pay their income taxes when due. An employee is also given benefits such as medical insurance, and a pension plan. An employee is directed what work is required of them and how to perform certain tasks.
Is your business IRS compliant when hiring contractors?
When hiring an independent contractor, the IRS looks for these three criteria to help make it clear whether you hired an independent contractor or an employee.
- How is the work done? Are you directing what hours to work, what tools should be used to complete the work? If so, you have an employee. If the worker sets their own hours and works alone with no direction, then you have an independent contractor
- An employee is paid a salary and has taxes pulled out of it. Independent contractors are paid when the work is done and do not have taxes pulled out of that paycheck.
- Benefits offered by your job are for employees. Independent contractors are responsible for their own benefits such as health insurance.
If you have any questions about independent contractors and how your business can stay compliant with the IRS, contact My HR Consulting. Download our 20 point checklist that will help you determine if you are in compliance with IRS regulations.