In recent years, the Department of Labor has become stricter in making sure that businesses are not misclassifying their workers as independent contractors. Accurately classifying workers as employees or independent contractors has significant tax implications for both the company and the workers. Additionally, these distinctions have important implications for workers’ rights such as overtime pay and wage obligations.

What is an Independent Contractor

Independent contractors are simply individuals who own and operate their own businesses by providing their own goods or services to others.

Because independent contractors can operate in a variety of roles and are not considered employees, there are several unique implications regarding compensation, taxes, and benefits. Independent contractors are not required to work a certain amount of hours and are not guaranteed overtime pay. Additionally, there is no guarantee of income or benefits plans, and they have to pay their own expenses. Lastly, independent contractors must pay self-employment taxes such as federal, state, Medicare, and Social Security taxes, which are not withheld from their payments.

For these reasons, among others, it is important that businesses are not classifying employees as independent contractors. The misclassification of workers can lead to workers missing out on important benefits that are owed to employees.

Questions to Ask

Although it can be difficult to make accurate distinctions between the two types of workers, the Department of Labor has established six questions to help determine whether a worker is an independent contractor or not.

  1. Does the worker play a vital role in the company by performing the primary type of service that is provided by the employer? Does the worker perform a supervisory role? Does the worker perform a job that is vital to the business’ success?
  2. How long has the worker existed at the company?
  3. Does the worker use his own materials to perform the job? Does the business reimburse the worker for any materials, tools, or supplies?
  4. Who performs quality control? Who sets the pay rate? Does the worker also work for other businesses? Who decides what hours are required to be worked?
  5. Were any investments, such as insurance or bonding, made by the worker? Can the worker generate a profit by performing the job more effectively or exercising managerial skill, or will the worker suffer a loss of capital investment?
  6. Does the worker perform basic tasks that require little to no training? Does the worker operate from a separate business site? Does the worker advertise his or her services independently through business cards or other methods?

Although the Supreme Court has determined these factors to be important when deciding whether or not a worker is an independent contractor, no single one of these questions is considered a controlling factor. Additionally, the IRS has established its own guidelines for differentiating between employees and independent contractors.