Defining Independent Contractors
There are many types of business professionals who fall into the category of independent contractors, such as doctors, lawyers, accountants, as well as general contractors and subcontractors. Overall, independent contractors have control over their own companies. They make the decisions on how their companies will operate, and they decide what products and services they will provide, as well as how such services will be performed. In contrast, hired employees perform services that are controlled by an employer who makes the decisions on what work will be done and how. Independent contractors and employers both have the legal right to control the details of how their products are to be delivered and how their services are to be performed.
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Tax and Withholding Differences:
When it comes to tax laws there are many important key differences between how employees and independent contractors pay taxes. For example, when someone is an employee, the company they work for must withhold income taxes, Social Security and Medicare taxes, unemployment taxes on wages, as well as half of their Federal Insurance Contributions Act taxes (FICA). However, these tax laws do not apply to independent contractors who are considered self-employed and are subject to Self-Employment Tax laws. Therefore, the burden of filing and paying taxes is the sole responsibility of the independent contractor.
Which category do I fall in?
The Internal Revenue Service (IRS) requires that workers be properly classified as either employees or independent contractors. Business owners are responsible for making these determinations. This can easily be decided by using what is known as a 20- point test offered by both the IRS and Texas Workforce Commission (TWC). This test will determine if you have been classified properly. The IRS assumes a worker is an employee unless it can be proven that they are indeed an independent contractor. Proper classification cannot be modified by agreement between a worker and employer, but only the dynamics of the working relationship will govern the proper classification.
Laws and Regulations for Independent Contractors:
Independent contractors must abide by certain laws and regulations in their business dealings on both a federal and state level. Most states have fines and penalties for not correctly classifying a worker as either an employee or an independent contractor. While these mandates ensure that employees get all tax and insurance benefits from their employers, misclassifying an independent contractor as an employee can be devastating to a contractor. In fact, these requirements make it more difficult to call workers independent contractors. Most states now utilize what they call an ABC test in which a worker must meet all three requirements to be considered an independent contractor. The requirements are as follows:
- The worker must be free from the control of the hiring entity.
- The worker must be performing work that’s outside the scope of the employer’s business.
- The worker must be “customarily employed” in the same type of work that is being performed for the hiring entity.
Know Your Rights:
Be assured that you have rights as an independent contractor. You have the right to control your own business dealings and to set your own schedule. You have the right to create contracts with your clients and the right to market your services. Knowing your rights as an independent contractor is imperative to the overall success of your business, saving you money by avoiding unnecessary fines and penalties.
Misclassification – The law is on your side:
If you feel you have been misclassified as an employee instead of an independent contractor, please call Scott Law Firm today. Matt Scott will review your case and determine if you have truly been misclassified as an employee and fight for reclassification for your company.