Independent Contractor Agreements
The independent contractor agreement is a legally binding documentation between business and a subcontractor, freelancer, or an independent contractor. This agreement is an all-encompassing agreement which clearly outlines the requirements and terms, as well as other details of the duties and tasks to be performed by all involved parties in terms of compensation, deliverables, agreement and other clauses.
What is an Independent Contractor?
The independent contractor is the individual working as a solo owner of a business and doesn’t require employee benefits. The independent contractor pays self-employment tax which includes Medicare and Social Security, along with income taxes on their own. They are responsible for sending their projected tax payments to Internal Revenue Service after every few months.
It is essential to determine if the individual you are about to hire for your business actually is an independent contractor, meaning they have the freedom to determine the ways in which the duties must be performed and when to perform, and where to perform in certain cases. If you have assigned working hours for the independent contractor, have control over their payment process without taking any of their input then keep in mind that that individual would be your employee and not an independent contractor.
Who is An Employee?
There are numerous businesses that are unable to distinguish between an independent contractor and an employee. If you properly classify a worker as your independent contractor than you can save a good amount on money for your business, but if the worker has not been clearly classified as an independent contractor than you might be at risk of major tax liabilities.
As an employer, you can typically withhold local, state, and federal income taxes, pay or withhold Medicare and social security taxes which have been mandated as per the FICA (Federal Insurance Contribution Act), as well as pay unemployment taxes on employee wages paid as per the FUTA (Federal Unemployment Tax Act), pay compensation fees to the workers and pay unemployment insurance tax to any state.
The status of an employee requires filing for a number of returns throughout the year with numerous tax authorities. Moreover, the employee also has rights for numerous benefits including retirement plans, health insurance, holidays and other benefits. When it comes to paying an independent contractor, the employer can’t pay or withhold any of the taxes.
Categories of Degree of Control and Independence
For determining if a worker is an independent contractor or an employee, the degree of control must be examined. This degree of control and independence can be divided into the following main categories:
There are numerous facts which indicate that a business has the right to control an direct the ways a worker performs their duties and tasks for which they have been hired includes the degree and type of instructions the worker has been assigned from the employer.
The employee of a business is usually subjected to certain instructions and guidelines provided by the employer regarding how, where, and when to perform their tasks and duties. Following are some of the examples of the instructions:
- The sequence or order to be followed when performing a duty
- The duties and responsibilities to be fulfilled by each hired individual
- From where the services and supplies must be purchased
- The types of workers required to perform certain duties or the type of workers to be hired
- The kind of equipment or tools to be utilized in order to perform the tasks
Where and when to perform the duties
While these instructions might vary as per the type of businesses, fields or jobs, the more thorough the instructions are the more control the employer has over their workers.
Even in cases where little to no instructions have been provided to the workers, certain behavioral control might exist if the business has the right to control the ways in which the worker performs the tasks or the ways in which the results are achieved. The main consideration is whether the employer has to certain extent maintained the rights of controlling any details of the performance of a worker.
The financial control includes the facts that indicate if a business has maintained the right of controlling the business elements of the job of a working, which includes:
- The degree to which a worker has unreimbursed employee expenses. There is more likelihood of an independent contractor having unreimbursed expenses as compared to an employee of the business. The ongoing costs that are fixed and are incurred despite of the work being performed are integral. However, an employee of the business might also have unreimbursed employee expenses in terms of the services that they might have performed for the company.
- The degree of the investment of a worker. The independent contractors mostly have major investment in the business’ facilities that they are utilizing in order to perform the services for that business. However, major investment might not be a necessary aspect to attain status of an independent contractor.
- The degree to which a worker offers their services to a business. The independent contractor usually has the freedom of seeking out various business opportunities. These independent contractors typically market themselves by maintaining an evident business location and can offer their services to any business which an employee of a business can’t do.
- The means through which a business makes payment to the worker. The employee is typically offered a guaranteed amount of wage for monthly, weekly, hourly or other period of time. This generally indicates that such a worker is an employee of the business, even if the salary or wage is based on the commission. The independent contractors are typically paid for their services through a flat fee which is usually paid by the end of the job or other payment terms previously agreed upon.
Aside from these facts, an independent worker might also face a financial loss on their work according to the situation but an employee is always provided a fixed amount of salary.
Type of Relationship
The degree of control and independence is also based on the type of relationship between a business and a worker. This generally includes:
- Legally binding contracts which explains the relationship between that both parties have the intention to create
- If a business offers a worker some type of employee benefits which may include paid leaves, pension plan, and/or an insurance policy.
The independent contract agreement protects a business from paying the services of a contractor and getting little to nothing in return. Simultaneously, it also protects the independent contractor from not getting paid by a business after providing the services.
If you are opting to hire an independent contractor, it is essential to create an independent contract agreement by consulting a lawyer. Feel free to contact Shiner Law Group and get a free evaluation of your case by our experienced business litigation lawyers.