Independent contractors are on the rise in the United States. With growing healthcare costs and a lagging economy, companies are doing more and more of their hiring on a contract basis. Independent contractors are in business for themselves. They are self employed, meaning they do not work directly for companies and have not been hired as actual employees. There are advantages and disadvantages to being an independent contractor. The advantages include the ability to decide your own hours, to choose when and for whom you want to work, and to negotiate your own terms and rate of pay. Drawbacks include the requirement of paying your own taxes as well as purchasing your own health insurance. The employment laws that pertain to independent contractors are not as comprehensive as those that pertain to the employer-employee relationship, in part because of the very nature of being an independent contractor. People who work for themselves often do so because they choose to work on their own terms.
Independent contractors often differ from freelancers in that they typically work under contract, often long-term, whereas freelancers tend to work from one assignment to the next, either without a contract or with a short-term contract. The term ‘independent contractor’ often is mistaken for someone who works in a construction or contracting type business. The fact is, though, that independent contractors can come from just about any line of work, including doctors, lawyers, accountants, computer technicians and analysts, dentists, and artists. (However, independent contractors who work in the arts more typically refer to themselves as as freelancers.)
One of the main factors in U.S. employment laws used to determine whether a worker is an independent contractor or an employee has to do with the amount of control the employer, or the person paying for the services, has over the individual. If the employer has the right to control the work product but not how the work is performed or the processes that are used to perform it, that individual typically is considered to be an independent contractor. The considerations used to determine the amount of control an employer has over an individual include: (1) whether the individual is provided with benefits such as healthcare, pension, and vacation; (2) who supplies the tools necessary to get the job done; and (3) whether there are written contracts involved in the relationship between the payer and the worker.
The Internal Revenue Service has specific criteria that help both workers and employers to determine whether an individual is an employee or an independent contractor. (And, word to the wise, this institution does not take too kindly to those who seek to muddy the waters between the two.) Employers have specific obligations to employees, and where the IRS is involved, the main obligation is paying certain taxes such as Social Security and Medicare. Under U.S. employment laws, there are certain situations that can amount to an individual being considered an independent contractor. Some of these include the following: (1) An individual provides services to other businesses; (2) an individual carries on business as the sole proprietor of such; (3) an individual is a member of a partnership that carries on a business or a trade; and (4) an individual is in business for himself even if working only on a part-time basis.
Many of the employment laws regarding independent contractors involve fulfilling obligations to the rest of America through the IRS in the form of taxes. Independent contractors typically are required not only to file annual tax returns, but they must also estimate their taxes on a quarterly basis and pay them as such. Unlike wage or salary earners, independent contractors are required to pay a self-employment, or SE, tax. This is a tax imposed on contractors and other self-employed individuals in order to satisfy tax obligations to Medicare and Social Security. Of course, this differs from employees, for whom such taxes are paid by their employers. It is vital for individuals as well as employers to know what constitutes the difference between an employee and an independent contractor, as misclassifications of these can result in tax penalties.
Because independent contractors often find themselves with fewer rights in the eyes of the law than employees, recent years have seen the rise of several unions created specifically for those who work as independent contractors. Such unions are popping up all over the country in greater numbers than ever before, with the main benefit coming in the form of assistance in paying healthcare coverage where before there was none.
Over the past few decades, being in business for yourself has become one of the top American dreams. And, since employers have discovered the benefits of contracting work without committing to long-term obligations and costs such as health insurance, independent contractors have become a major force in the U.S. job market and economy. Employment lawyers are a rich resource for deciphering America’s employment laws. If you are an independent contractor in NJ contact an employment attorney in New Jersey if you have more questions concerning current employment laws that pertain to independent contractors and how such laws can benefit your business.