Most of you would look at the question in this title and say, “NEVER!” That answer will generally serve you in most situations, but, as it turns out, it is possible to be both.
It’s best to be judicious in the use of independent contractors.
The U.S. federal government, in particular, the IRS and the US Department of Labor, sees the use of independent contractors as a way for employers to get around paying taxes. Thus, there’s been a concerted effort to clamp down on the use of the IC.
The standards have been around for quite a while, with the IRS publishing the 20 Factor Test to provide guidance to employers in the past. More recently, they’ve created a different set of rules that provide guidance for classification based on the amount of control that is exercised over a worker. This control is divided into three categories: behavioral control, financial control, and the nature of the relationship.
The IRS defines behavioral control as the factors that determine whether the business has a right to direct and control how a worker does the task for which he or she was hired. If the business tells the employee:
Then the worker is most likely NOT going to be considered as an independent contractor. Even if no instructions are provided, there may still be control involved if the business dictates how the work results are to be achieved.
Financial control depends on many issues. These include:
Factors that go into this determination are things like contracts; the permanency of the relationship; whether the business provides insurance or other benefits; and how integral what the worker does is to the operations of the business. A good example would be a chef for a restaurant. A chef is integral to the business of preparing food and would not be considered an independent contractor. A specialist chef, who prepares food for a one-time event for the restaurant, could be considered an independent contractor.
According to the IRS, there is one group of workers who may meet the standards of being an independent contractor under the above-mentioned common law standards, yet at the same time must be considered employees for the purposes of having employment taxes withheld. These people are known as “statutory employees” if they fall any of the following four categories:
In addition to these four categories, there are also three tax conditions that must be met. These are:
If these three conditions are met, then the employer must withhold Social Security and Medicare taxes from payments made to these employees.
So, those are the unusual conditions in which you can have an independent contractor who is also an employee. Employers must take care of today to preserve and to correctly apply all of the required standards.
The US Department of Labor also has a standard for independent contractors, which mirrors in many ways the IRS standards. They throw in an additional standard, based on:
“the level of skill required in performing the job and the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent enterprise (examples: Does the worker perform routine tasks requiring little training? Does the worker advertise independently via yellow pages, business cards, etc.? Does the worker have a separate business site?).
If you’re an employer, it’s important to understand and apply these standards, since there are major tax and wage consequences. On the state level, mistakes in misclassification will also have an impact on workers’ compensation rates.
If you’re an employee working under the title of Independent Contractor, it’s also important for you to understand these requirements. If you are improperly classified, you may not get back any taxes you’ve paid.
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International HR Director for OSF Global Services, Andreea is a veteran recruiter who has seen them all. She developed HR recruiting strategies and retention programs that guarantees the success of the company. She is a people person and she handles very easy new relationships with new employees, but her most interesting challenge is to find the middle way between company’s best interests and employee’s needs. To learn more about Andreea contact her on LinkedIn.