Continuing in my series, So You’ve Been Laid Off, I’d like to talk about a subject from my own experience. While many temp agencies are quite reputable and a good source of work when you are in need, there are some companies out there who will try and take advantage of your situation. A case in point is requiring you to work as an independent contractor. I had been out of work for almost 3 months last year when I was offered a job as an independent contractor. Not really understanding all the ins and outs of the situation, I took the position.
What Is An Independent Contractor?
Essentially, an independent contractor is someone who provides services to another business as a business themselves rather than as an employee. The IRS has very specific guidelines about who can and who cannot be considered an independent contractor. The IRS has outlined certain Common Law rules for determining the status of a position as employee or independent contractor.
- Behavioral: How much control does the company have over your work? Are you required to work at their location? Do they mandate when you work? The more control over how the work is produced, the more likely you should be considered an employee rather than an independent contractor.
- Financial: How are you paid, by the job or by the hour? Do you provide your own supplies? Are your expenses reimbursed by the company? If you are paid by the hour, you are more likely to be considered an employee. Likewise, if the company provides all supplies and/or reimburses your expenses, you would more likely be an employee.
- Type of Relationship: Is this a short term position or will you be there indefinitely? Do you have a written contract? Do you receive benefits? Those who are working indefinitely and/or receive benefits are usually employees. If you have a contract outlining the work to be provided, pay to be received, and clear start and end dates, you’re more likely to be considered an independent contractor.
These aren’t hard and fast rules. Each position must be determined individually. But you can get a general idea how to determine the position’s proper status.
What Does Being an Independent Contractor Mean?
In practical terms, being an independent contractor means you have none of the benefits of being an employee.
- Taxes – you are responsible for 100% of your taxes. The company will not withhold payroll taxes. It is up to you to estimate the amount of taxes you’ll owe and make quarterly payments to the IRS. If you under-withhold, you will be liable for penalties.
- Social Security and Medicare Taxes – Normally, the employer pays half of your SS and Medicare taxes. Not if you’re an independent contractor, though. You’ll be paying all of that cost yourself. That will be 15.3% of your income, instead of 7.65%. That can add up.
- No Employer Provided Benefits – Zip, zilch, nada. You don’t qualify for health insurance, vacation, sick leave, holiday pay, or any other employer sponsored benefit. You aren’t an employee, so you don’t qualify.
- No Unemployment or Workers Compensation – When the job is over, it’s over. You don’t qualify for Unemployment Insurance. You also don’t qualify for Worker’s Compensation if you get hurt on the job, unless you carry some insurance yourself, at your own cost, of course.
- No Labor Law Protections – the laws on the books designed to protect the rights of employees, such as the Fair Labor Standards Act, don’t apply.
What To Do If You’ve Been Misclassified
If you think you’ve been misclassified as an independent contractor, you can ask the IRS to make a determination. File Form SS-8. Understand, though, that this form is not anonymous. A copy is sent to your employer in order to get more detailed information about the position so the IRS can make a determination. Also, there is no law on the books that forbids retaliation for filing an SS-8, so it’s a risky business. At the moment I’m being threatened with a lawsuit for breach of contract by a former employer that lost when I filed an SS-8. Not that they’ll win, but they’ll certainly try.
Your best bet, don’t take a job as an independent contractor unless you truly do want to go into business for yourself. And then be sure that you’ll be your own boss in any contract you accept. Learn from my mistake, go into the whole thing with your eyes open.