About Independent Contractors
The guidelines that are used by the Internal Revenue Service to determine who can be called an employee versus an independent contractor continue to confuse business owners today. Part of that confusion exists because the guidelines are somewhat subjective in nature. Read on for a better understanding of this often misunderstood entity.
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History
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Although independent contractors have always existed, they haven't been as rigorously watched as they are now. As soon as Uncle Sam became aware of the large sums of money being passed under the table, the IRS was brought in for oversight. In turn, the IRS established guidelines under which one could determine independent contractor status. However, each year, the reigns on independent contractors are tightened more, in an attempt to keep anyone from slipping through the cracks.
Function
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Independent contractors usually function pretty much on their own. They work for themselves--not for the individuals that hire them for a short-term service. They set their own goals and objectives and monitor their own work. As such, they are expected to establish some legal form of business like a sole proprietorship, partnership, limited liability company or corporation.
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Types
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There are dozens of different types of independent contractors. Doctors, lawyers, building contractors, certain kinds of salesmen, hairstylists and freelance writers generally fall under the umbrella of independent contractor. They are stand-alone entities that often have no permanent connection to a particular business. A lot of different types of occupations or professions can be considered either an employee or an independent contractor. Independent contractor status, is therefore, dependent upon other guidelines.
Considerations
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When trying to identify an independent contractor from an employee there are certain things to keep in mind. First, independent contractors typically have a separate business established. They have their own offices, tools and equipment and anything else they need to run the business. Secondly, the individual performs the same service for many different businesses--not just for one. Independent contractors set their hours and control the parameters within which they work. Employers exercise little to no control over how the service is performed, just the final outcome. While they may be given a deadline to meet, the timing used to complete that deadline is established solely by them. They receive no company supervision or training. They are not put on company rolls, do not have taxes withheld like an employee, and do not attend company functions.
Misconceptions
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Many business owners think that by paying cash for the occasional services of an individual, without withholding taxes or keeping track of the money in their books keeps them safe. They couldn't be more wrong. Trying to hide employee wages through this type of mechanism can open a business up for hundreds, even thousands, of dollars in back taxes and associated penalties. The way a person is paid has very little to do with their employment status (or lack thereof).
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