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Contract Jobs

Read about the requirements for independent contract jobs.

Those with contract jobs sometimes find themselves on the move. [©Shutterstock, 2010]
©Shutterstock, 2010
Those with contract jobs sometimes find themselves on the move.

Contract jobs, or independent contractor jobs, differ from ordinary employment in a number of ways. Independent contractors are self-employed and may work as freelancers or consultants, or own their own business. A company might hire an independent contractor on a temporary basis to execute a project that cannot be completed in-house, though a contractor may also have an ongoing relationship with a client. Independent contractors usually have more than one client at any given time.

Many contractors enjoy the freedom that comes with being one's own boss, but there are downsides. Contractors usually do not receive benefits from their clients and are required to pay self-employment taxes. Most labor laws do not apply independent contractors, and they have no job security - and little recourse if they are not paid. On the upside, they qualify for more business deductions than the average worker and are often paid more.

Classifying Independent Contractors

The Internal Revenue Service (IRS) notes that there is no magic formula for determining whether a person providing service is an employee or independent contractor. According to Ohio State University, the IRS has instead developed a series of 20 questions to gauge the degree of control a business exercises over a service provider, and the degree of independence a provider has over how he or she works. There are three main points of interest: behavioral, financial and the type of relationship between employer and provider.

Behavioral concerns include whether an employer has the right to enforce how contractors do their job. For instance, many employees are required to adhere to a dress code and be at a place of business during scheduled times, but this is rarely the case for an independent contractor. Financial questions cover how the provider is paid and how often, whether the employer provides the tools needed to do the job, and whether the employer reimburses business expenses. Independent contractors usually provide their own tools and cover their own expenses.

The type of relationship between provider and employer is perhaps the most nebulous concept, because it concerns the expectations of both parties. To determine whether relationship is that of employer-employee or client-contractor, the IRS cites the permanence as a factor; if the relationship expected to continue indefinitely, the provider is likely an employee. The agency also considers whether the services provided are essential to the business. For instance, an accountant hired by an accounting firm would perform services inherent to the business's mission and purpose, and therefore the relationship would probably be that of employer-employee.

Tax and the Independent Contractor

An independent contractor's tax position is quite different from that of an employee. In an employer-employee situation, each party is responsible for paying half an employee's Social Security and Medicare taxes, which amounts to 15.3 percent of the employee's taxable income. So, the employer pays 7.65 percent to the government and withholds the rest from an employee's pay. By January 31 of each year, an employer must issue a W-2 form that states how much an employee was paid the previous year, and the amount withheld to cover federal, state, Social Security and Medicare taxes.

Independent contractors receive a 1099 form from businesses that have paid them more than $600. Those who receive 1099 income are responsible for paying the full 15.3 percent towards Social Security and Medicare - the IRS refers to this as self-employment tax, or SE tax. In addition, the Department of Labor reports that, though a business could choose to include an independent contractor on its health plan, that benefit would not be tax-exempt, as it is for employees.

Contractors must pay any other applicable federal or state taxes, which are not withheld from their income. Instead, the IRS requires self-employed workers to make quarterly estimated tax payments if they expect to owe more than $1,000, or if they expect that their total credits and withholdings will equal less than that listed on their previous year's tax return.

Misclassified Employees

Some unscrupulous employers attempt to classify as independent contractors those who are rightfully employees. In doing so, the benefits to the business are many: it is not responsible for payroll taxes, unemployment or disability insurance, or Social Security. The company is not liable for injuries incurred on the job, nor is it even required to give employees a lunch break. Anti-discrimination laws and other labor protections do not cover contractors.

The California Department of Industrial Relations notes that the penalties are stiff for businesses that wrongly classify employees, which is why most carefully consider their provider relationships. Workers who suspect they are employees should not be intimidated if they signed a contract asserting their independent contractor status. A labor commissioner will look into the nuts and bolts of the relationship when making a determination, rather than just the paperwork.

 

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