Independent Contractor
| Author | Jeffrey Lehman, Shirelle Phelps |
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A person who contracts to do work for another person according to his or her own processes and methods; the contractor is not subject to another's control except for what is specified in a mutually binding agreement for a specific job.
An independent contractor contracts with an employer to do a particular piece of work. This working relationship is a flexible one that provides benefits to both the worker and the employer. However, there are drawbacks to the relationship as well. The decision to hire or work as an independent contractor should be weighed carefully. Properly distinguishing between employees and independent contractors has important consequences, and the failure to maintain the distinction can be costly.
The status of independent contractor carries with it many tax ramifications. For example, an employee shares the costs of SOCIAL SECURITY and MEDICARE taxes with his or her employer; whereas an independent contractor is responsible for the entire amounts. Yet independent contractors generally qualify for more business deductions on their federal income taxes than do employees. Also, independent contractors must pay estimated taxes each quarter, whereas employees generally have taxes withheld from their paychecks by their employer.
One important disadvantage of working as an independent contractor is that standard employment benefits?such as health, life, dental, and disability insurance; funded retirement plans; paid vacation time; and paid maternity or PATERNITY leave?are not available. Independent contractors may fund their own benefits, but not on a tax-free basis?whereas many benefits provided by employers to employees are, by law, tax free.
Congress and the states have enacted numerous laws geared toward protecting employees. The National Labor Relations Act
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(29 U.S.C.A. § 152(3)) protects employees and union members from unfair bargaining practices; Title VII of the CIVIL RIGHTS ACT OF 1964 (42 U.S.C.A. § 2000 et seq.) protects employees from discrimination on the basis of race, sex, religion, and national origin; the Age Discrimination in Employment Act (20 U.S.C.A. § 623) protects employees from age discrimination; the FAIR LABOR STANDARDS ACT (29 U.S.C.A. § 203) establishes MINIMUM WAGE and overtime standards; the EMPLOYEE RETIREMENT INCOME SECURITY ACT of 1974 (29 U.S.C.A. § 1002) ensures the security of employee retirement funds; and the OCCUPATIONAL SAFETY AND HEALTH ACT (29 U.S.C.A. § 652) protects employees from environmental work hazards. Most states also have unemployment and WORK-ERS' COMPENSATION laws, which obligate employers to pay, directly or indirectly, for medical treatment or lost wages, or both, for employees who are injured while at work or who lose their job. None of these laws protect independent contractors. And because compliance often comes at great expense, employers can significantly reduce their liability and increase their profit margin by hiring independent contractors rather than employees.
Although not...
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