Employment Definition of Contract for Services
Although a contract for services and a service contract do not sound very different, independent contractors and employers know otherwise. A contract for services is extended to a self-employed individual whereas a service contract is an ordinary employee contract. Self-employed individuals, also known as independent workers or contractors, hire themselves out to clients and try to make long-term clients out of short-term contracts for services.
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Contract for Service Versus a Service Contract
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Whether or not an employee is truly an independent contractor that can work under a contract for services agreement, or a regularly contracted employee, is determined by the IRS based on the degree of control in three areas. Does the company has excessive control over how and where the worker completes the project, or behavior control, as well as financial control of payments, reimbursements of expenses? And who supplies and pays for the necessary tools? Employers also have to think about the type of relationship required during the duration of a project, and employee benefits offered before making a decision to extend a contract for services or a service contract. Contracts for services can possess the characteristics of a service contract to some degree, but as a general rule if the company exerts excessive control over the situation, the employee is not truly an independent contractor and should receive a normal service contract.
Advantages for Companies
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Outsourcing, or contracting self-employed individuals for services, is advantageous to companies because it decreases the management and employment expenses, limits the number of employees in the office, allows for changes in supply and demand in your business and minimizes risks for the employer. Service providers are contracted for a specific purpose and are responsible for delivering a satisfactory final product or level of service. Company expenses are also reduced because the company is not required to pay benefits or social security under most contract for services agreements. Contracts for services are a good way for companies to try a provider and evaluate the quality of services provided, gradually building a relationship before making a commitment to a long-term collaboration.
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Advantages for Independent Contractors
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For the service provider or independent contractor, a contract for services is advantageous because of the degree of flexibility it offers wherein the provider can often choose when, where, how and sometimes even who performs the service, as long as the service in question is satisfactory as evaluated by the client using the terms outlined in the contract for services. A contract for services is also advantageous because it gives the contractor the opportunity to try a company on for size. If the company does not pay the contractor on-time or mistreats the contractor, the contract can decide not to enter into future contracts for service with the client.
Disadvantages for Companies
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Contracting for services does not usually involve a lengthy recruitment process, but rather selecting a provider from an online guide or a phonebook, who may or may not have been recommended to the company. Because of this, the quality of services received can be questionable. Additionally, depending on the type of contract for service used, companies may end up receiving the services from a different individual than the one they selected prior to entering the agreement. Also, if the company contracting self-employed individuals is not careful, an independent worker could protest the contract for services as inadequately defining their employee status in labor court and the company could be obligated to pay government fines and employee expenses. When in doubt, companies can clarify an employee's situation with the IRS using form SS-8 for determining worker status.
Disadvantages for the Independent Contractor
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Self-employed individuals working under a contract for services have to pay their own social security and health benefits. Furthermore, they are responsible for taking into account taxes due at the end of the year because as they are self-employed, no employer is withholding taxes due and are generally responsible for any expenses related to tools, materials and equipment necessary to complete a project. While independent contractors working under contracts for services have a high degree of flexibility, they also have less job stability and generally speaking, their potential success or failure depends heavily on their ability or inability to build and maintain a client base.
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- Photo Credit Group of business people working together in the office. image by Andrey Kiselev from Fotolia.com
