So, you’re ready to hire some help but you’re not sure whether an independent contractor or employee is the right fit for your online business. Whether you’re looking to hire a Virtual Assistant, Copywriter, Bookkeeper, or an individual in some other niche, you need to know what “independent contractor” means before you even start your search.
Why? Because you can be penalized if you get it wrong. And no one wants to end up on the Internal Revenue Service’s bad side!
Everything I chat about here is intended to provide legal information and education. It is not business, financial, or legal advice, and does not create an attorney-client relationship between us. I’m an attorney licensed in the United States, so everything will be from the perspective of United States law. You should consult with an attorney in your area who understands your particular business situation so that you can take the right steps for you and your business.
Is an independent contractor an employee?
The short answer is no.
The biggest difference between employees and independent contractors is how they are taxed and the Internal Revenue Service (IRS) plays a huge role in that determination.
Employees receive a W2 from their employers, who are obligated to pay one-half (½) of the employees’ FICA taxes (Social Security and Medicare) as well as unemployment taxes.
Independent contractors, on the other hand, receive a 1099 from the companies they work with and are required to pay 100% of their own self-employment and income taxes.
Since the IRS has such a huge interest in whether people are classified as either an employee or independent contractor (hello tax collector), it created a test to make the determination.
What is the independent contractor test?
The IRS’s 20-part “right to control test” determines whether someone is an employee or an independent contractor. The distinction is incredibly fact specific and made on a case-by-case basis.
- Level of Instruction – Do you control when, how, and where the work is to be done by your worker?
- Amount of Training – Do you provide training for your worker?
- Degree of Business Integration – Do your worker’s services significantly affect your company’s success?
- Extent of Personal Services – Do you require your worker to complete the services personally or can she subcontract assignments to others?
- Control of Assistants – Do you assist in hiring, supervising, or paying your worker’s assistants?
- Continuity of Relationship – Is your relationship with your worker ongoing? Or does it involve multiple sequential projects?
- Flexibility of Schedule – Does your worker have control over the hours she works and the days of the week on which she works?
- Demands for Full-Time Work – Is your worker putting in full-time hours for you?
- Need for On-Site Services – Does your worker perform services on-site or is the work performed elsewhere?
- Sequence of Work – Do you dictate the order in which assignments need to be completed by your worker?
- Requirements for Reports – Do you require your worker to regularly provide you with oral or written status reports?
- Method of Payment – Do you pay your worker hourly/weekly/monthly or on a per project basis?
- Payment of Business or Travel Expenses – Do you reimburse your worker for business or travel expenses?
- Provision of Tools and Materials – Do you provide your worker with equipment, tools, and/or materials to perform her services?
- Investment in Facilities – Do you provide a facility for your worker to perform her services or does the worker maintain her own?
- Realization of Profit and Loss – Does your worker have the chance to receive significant profit or loss through her work?
- Work for Multiple Companies – Does your worker provider services for multiple companies or just yours?
- Availability to the Public – Does your worker make her services available to the general public?
- Control Over Discharge – Is your ability to terminate your worker’s services dictated by a contract?
- Right of Termination – Can your worker terminate her services at will or is her termination dictated by a contract?
So, what do all these factors mean? A person doesn’t have to meet all 20 factors to qualify as either an independent contractor or an employee.
Generally speaking, the more control a business exerts over where, how, when, and by whom work is to be performed, the more likely it is that the IRS will find a worker is an employee and not an independent contractor.
What if I get it wrong?
If you misclassify someone as an independent contractor when they’re really an employee, the penalties are steep! And they’re even steeper if you do it on purpose.
If you’re really not sure whether the position you intend to offer is for an independent contractor or an employee, you can submit a Form SS-8 to the IRS for a determination. You can read more here. But I highly recommend you speak with an employment attorney in your local area first!
Does a written contract help?
Having a written contract in place with your independent contractors is an important business practice because it helps establish that they really are independent contractors in the eyes of the IRS. If you’re not sure where to start, you can snag an Independent Contractor Agreement Template in my Legal Shop.
And for a general overview of the legal issues you should consider for your online business, snag a copy of An Online Entrepreneur’s Guide to Starting a Business.