What Is an Independent Contractor?

Nowadays, with new rules and regulations from the IRS, employers need to know what independent contractors are and how to identify them. 

Here is what employers should understand regarding independent contractors.

What Is an Independent Contractor?

Part of operating a business involves withholding and paying income taxes, social security taxes, medicare taxes, and unemployment tax on wages paid to your employees. However, that's true for employees, NOT an independent contractor. 

Independent contractors handle their own taxes, among other things, making them a valuable asset for many types of businesses. 

Definition of an Independent Contractor

The IRS definition of an independent contractor is not a straightforward one. Generally, independent contractors are defined as "a person for whom the services are performed has the right to control or direct only the result of the work and not what will be done and how it will be done". Independent contractors are also considered self-employed. 

That said, to truly determine whether or not a worker is an independent contractor or an employee, employers need to analyze the relationship between the employer and the worker using a list of rules developed by the IRS.

In total, the list includes six factors to consider.

How to Identify Independent Contractors

In order to identify independent contractors, there are six factors that should be evaluated equally to determine if a worker is in business for themselves as a matter of economic reality. Those who are, are independent contractors.

The six factors are as follows:

1. Evaluating the opportunity for profit or for loss depending on managerial skill
2. Evaluating investments by the worker and the potential employer
3. Evaluating the degree of permanence of the work relationship
4. Where does the nature and degree of control lie
5. What extent of the work performed is an integral part of the potential employer’s business
6. Are there any special skills and initiatives required

Once an employer has reviewed each factor carefully, they should be able to make a determination. Employers should be encouraged to document all factors and common laws used to determine the relationship as well. 

In the event a determination can not be made, employers can reach out to the IRS by submitting Form SS-8. The IRS will then review the factors and circumstances and make an official determination on behalf of the employer or worker.

Employers may also want to include this in the information covered in an employee handbook, to help avoid confusion and disagreements. 

Benefits of Hiring Independent Contractors

There are many benefits to hiring independent contractors. For small businesses especially, independent contractors are a popular choice.

When organizations are just starting out, they can't always necessarily afford to hire employees for all their needs. Independent contractors are also a popular choice when there is a need to hire someone to work independently on a short-term assignment, often a one-time project revolving around a task that lies outside the skills of your employees. 

Other benefits of hiring an independent contractor include: 

• No need for training or onboarding
• They are not entitled to employee benefits
• They handle their own income taxes, social security taxes, medicare taxes, and unemployment taxes
• They are responsible for their own career development and growth

Get Help with Independent Contractors

If you are struggling with identifying independent contractors, you may want to consider reaching out to an HR and payroll company for help.

To learn more about how Trivantus can help employers with employee and worker classification, as well as other payroll, HR, and compliance matters, contact us today. 

Employers may also want to consider evaluating payroll software, as it can help guide employers through payroll tax withholding, and more.