Employee or Independent Contractor

By | Nov 30, 2009

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. About social security, you may consider enterprise risk assessment software. For more details and concerns, you can ask the staff of circadianrisk.com or contact 248-599-1935.
  • 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.


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5 Comments so far
  1. Patricia (1 comments) December 1, 2009 3:09 pm

    Wow I wish I had known all this when I was contracting for assistance in caring for my mother in her final year. Her best caregiver refused to join and agency or be an independent contractor….2 year later I am still working on closing my mother’s business and paying benefits and retirement for this employee…Nothing like being 94 and staring your own business to get the competent help you require…

    Good job…and I hope you have a good job situation now!

  2. Jodith (189 comments) December 3, 2009 6:00 pm

    I know….it’s so hard when you’re taking care of a loved one. We were really lucky when my mom was sick. The hospice agency the doctor referred us to was so good, and my mom loved all of the caretakers that came to the house. I wish we’d had them when my dad was sick. Like you, we hired someone to take care of him, so he’s have someone he liked and we trusted.

    Right now, I’m trying to set up a Virtual Assistant business so I can work from home. It’s slow going, though. I’ve had a couple of possible job opportunities, but they always seem not to work out in the end, so I started concentrating on running my own business. I figure with 20 years in the field, I have a lot to offer small businesses who need occasional help.

  3. sarah (1 comments) December 14, 2009 11:39 am

    Wow, thank you so much for sharing this! I know there are a lot of families that are looking for good caretakers to help their families. I know that I had through a handful myself before my father passed away and still wasn’t a 100% satisfied with the care he received. It so hard to find somebody here in Dallas that I can trust to help me with my mother. Opening a new business for myself so that I can stay at home and take care of her myself is an option, but with the economy the way it is, I don’t know if I could afford to start all over. How has your business gone? How long did it take you to make a profit?

  4. Jodith (189 comments) December 20, 2009 7:55 pm

    It is hard starting your own business. It helps if you have a cushion to work with financially when you go out on your own. Things with my business is going slowly. I’m not yet at a profit, but it’s getting there, and I’ve got some good opportunities opening up for me.

  5. Joann (1 comments) January 8, 2010 4:26 pm

    Employers and employees should get a little education an facts about what is an employee and self employeed contractor.

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