Independent contractors are individuals who are in business for themselves and hire out their labor to clients. Often, business owners prefer to hire independent contractors rather than maintain employees because of the contractor's unique advantages. By hiring an independent contractor, the small business owner does not have to pay the employer's portion of the Social Security tax, unemployment taxes, workers' compensation insurance premiums, or employee benefits - thereby saving 30% or more in employee costs.
Employers are cautioned to be extremely careful not to misclassify a worker as an independent contractor. Such misclassification can lead to the employer being held responsible for uncollected income taxes, Social Security taxes, unemployment taxes, and penalties for not having adequate workers' compensation coverage.
Different federal and state government agencies have different ways of assessing whether a worker is an employee or an independent contractor. Among those agencies are the IRS, the U.S. Department of Labor, state taxing authorities, and state unemployment and workers' compensation agencies. One commonly recognized assessment is the Internal Revenue Service's 20 factor test.
Download the current IRS Publication 1779 covering this issue(PDF)
Download IRS Form SS8 to submit to the IRS for a determination ruling(PDF) |
