Independent Contractors
Independent contractors exist in virtually every type of workplace, large and small, blue collar and professional. The federal government estimates that almost nine million people work as independent contractors in occupations ranging from farming to computer technology to upper-level management. Contractors go by any one of a number of names -- consultants, freelancers, self-employed, entrepreneurs, and business owners -- but they all have two common traits: They are in business for themselves, and they don't rely on a single employer for their livelihood.
Hiring independent contractors can be a smart, cost-effective alternative to taking on employees. They can add a lot of flexibility and expertise to your workforce without the financial and legal burdens of hiring employees.
Using independent contractors does have some drawbacks, however. The biggest drawback of all is that numerous federal and state government agencies keep a close watch on any employer who uses independent contractors. These agencies want to make sure employers aren't taking unfair advantage of workers (and skipping out on their tax obligations) by calling them independent contractors when they should really be classified as employees. If you try to skirt the law and get the benefits of the arrangement while shirking your responsibilities, you'll end up in legal hot water.
Classifying Workers
There are many -- often contradictory -- tests for determining whether a worker is an independent contractor or employee.
You may think a worker's status as an independent contractor or an employee depends on what you and the worker decide. As long as you two agree on the terms of the relationship, that's all that matters, right?
Wrong. The federal government and state governments care a lot about how a worker is classified. Not surprisingly, the root of their concern is money. You'll pay fewer taxes (including expensive payroll taxes such as Social Security and Medicare) for an independent contractor, and you'll have fewer legal obligations to an independent contractor than to an employee. Thus, it's in your interest to label a worker as an independent contractor. By contrast, it's in the government's interest to label the worker as an employee -- the more employees there are in this world, the more money there is in government coffers.
Unfortunately, there are few clear-cut answers to whether a worker qualifies as an independent contractor. There are as many independent contractor tests as there are government agencies that deal with workers -- from your state unemployment office to the federal Internal Revenue Service. So figuring out how to treat a worker so that agencies see an independent contractor can be a complicated undertaking.
Employers who don't learn the rules before they hire an independent contractor can get hopelessly confused -- and get into trouble with one agency or another. To avoid problems such as audits, fines, and taxes, understand the rules of all of the following agencies before you hire a worker. (For more about fines and taxes, see Benefits and Drawbacks in this chapter.)
Independent Contractors continued