All types of industries use independent contractors. This type of working relationship is mutually beneficial, allowing companies to pay for labor only as they need it and letting specialized workers set up as businesses themselves. You will find them involved with the building of a house, completing an analysis for a Fortune 500 company, or working special projects for the government.
No matter the industry or role of the contractor, there are specific guidelines to use during the hiring process that are important to understand. If you hire an independent contractor and end up treating them like an employee, you are likely to end up with a large tax liability that could be devastating to the health of your business.
By definition, an independent contractor is a person or business who performs services for another person or business under an express or implied agreement, and who is not subject to the other's control, or right to control, the manner and means of performing the services. This means that while you have the right to direct or control the results of the work performed, the contractor has the right to choose the means and methods for reaching the desired results.
Other elements that are considered when differentiating an independent contractor from an employee include:
- whether the worker was carrying on an independent business or whether they worked regularly in the hiring company's general business.
- whether they advertised or generally offered their services to others.
- whether or not they used a business name in dealing with the hiring company.
- whether they listed themselves in business directories (e.g., telephone, community, online)
- whether they maintained their own offices.
- whether they obtained the necessary licenses for their type of work.
- whether they supplied their own tools or equipment;
Another factor is the relationship between the company and the contractor. An independent contractor complete an agreed upon scope or work within a stipulated period of time, whereas an employee works continuously for an unspecified length of time.
Generally speaking, an independent contractor has the opportunity to make a profit as well as the risk of taking a loss, while an employee generally does not have that opportunity nor risk. An employee is generally paid on a time or piece-work or commission basis, whereas an independent contractor is paid an agreed-upon amount or fee for a specific job.
The bottom line is that an independent contractor versus employee comes down to evidence of control and independence. In other words, behavioral control, financial control, and relationship type are all factors. Behavior relates to you having any right to direct or control the way in which the contractor is working, which could be via training, direction, etc. Financial would be whether you have the right to direct or control any of the aspects of the contractor's job from a financial standpoint such as payment method, un-reimbursed business expenses, etc. Then, relationship type is the perception of the business relationship.
If there is any question in your mind about whether an individual doing work for you is a contractor or an employee, consult your tax and legal advisors. After all, protecting your business while growing it is a primary focus and by understanding the rules of the road ahead of time, you do just that.