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For additional state government information about Independent Contractors in Oregon, please visit the website www.oregonindependentcontractors.com.
State Income Tax and Local Government Transit Tax Responsibilities
Are you an Independent Contractor without employees? If “Yes”, depending on the location of your jobsite, you may be subject to both Oregon income tax and transit self-employment tax. Click on the following links for more information about your individual Oregon tax responsibilities.
Are you an Independent Contractor with employees? If “Yes”, depending on the location of your jobsite and your employees jobsite, in addition to your own tax responsibilities, you may be responsible for both withholding Oregon income tax and paying transit tax on employee payroll. Click on the following links for more information about your Oregon tax responsibilities as an employer.
What is the difference between an employee and an independent contractor?
Individuals who are hired and compensated for services are employees. Their compensation earned for services are taxable unless specifically excluded by law.
Generally, Oregon law requires employers to withhold and pay income taxes from employee wages along with unemployment and workers' compensation. Also, employers may be subject to TriMet or Lane Transit District payroll taxes. Transit payroll taxes are employer paid and based on the gross payroll paid employees within the TriMet or Lane Transit districts.
Individuals who meet the statutory definition of an independent contractor are not employees and their compensation earned for services are not subject to withholding or transit payroll taxes. The Oregon Revised Statute (ORS) defining an independent contractor lists specific criteria (below) that an individual must meet to be considered an independent contractor. Individuals who do not meet ALL of the standards are employees and their compensation earned for services are subject to withholding and transit payroll taxes.
Who is an Independent Contractor?
As of January 1, 2006, Oregon’s newly revised independent contractor law is effective. An individual or business entity that performs labor or services for remuneration shall be considered an independent contractor if they meet ALL of the standards outlined in the new law.
Oregon Revised Statute 670.600, defines independent contractor for Oregon Department of Revenue, Employment Department, Construction Contractors Board, and Landscaping Contractors Boards.
Independent contractor law has not changed as it relates to the Workers Compensation Division or Bureau of Labor and Industries.
If you have maintained an ongoing business relationship with an independent contractor beginning before January 1, 2006, the provisions of the old law apply to your relationship through December 31, 2005, and the provisions of the new law apply to your business relationship as of January 1, 2006.
The new law considers service providers to be independent contractors if they:
- Are free from direction and control, subject only to the right of the service recipient to specify the desired result.
- Are licensed under ORS 671 or 701 (Construction Contractors Board, State Landscape Architect Board, Landscape Contractors Board or State Board of Architect Examiners) if required for the service.
- Are responsible for other licenses or certificates necessary to provide the service.
- Are customarily engaged in an independently established business (if they meet 3 out of the 5 below):
- Maintain a business location that is:
- Separate from the business or work location of the service recipient; or
- In a portion of their own residence that is used primarily for business.
- Bear the risk of loss, shown by factors such as:
- Entering into fixed price contracts;
- Being required to correct defective work;
- Warranting the services provided; or
- Negotiating indemnification agreements or purchasing liability insurance, performance bonds, or errors and omissions insurance.
- Provide contracted services for two or more different persons within a 12-month period, or routinely engage in business advertising, solicitation or other marketing efforts reasonably calculated to obtain new contracts to provide similar services.
- Make a significant investment in the business through means such as:
- Purchasing tools or equipment necessary to provide the services;
- Paying for the premises or facilities where the services are provided; or
- Paying for licenses, certificates or specialized training required to provide the services.
- Have the authority to hire and fire other persons to provide assistance in performing the services.
- Note: A person who files a Schedule F as part of their income tax return and also performs farm labor or farm services reportable on a Schedule C of an income tax return isn’t required to meet 3 out of the 5 independently established business requirements.
- The creation or use of a business entity, such as a corporation or limited liability company, does not establish that the individual providing services will be considered an independent contractor.
What if I incorrectly classify an employee as an independent contractor?
Instances when an employer incorrectly classifies an employee as an independent contractor may be viewed, depending on the specific situation, as a violation of ORS 316.167 and related administrative rules. For income tax withholding purposes, this means an employer may be liable for penalties and interest for not properly withholding income tax from someone who should have been classified as an employee.
Since transit payroll tax is employer paid and based on the gross payroll paid within the TriMet or Lane Transit districts, an employer may be liable for past tax plus penalty and interest for the period they paid the incorrectly classified employee.
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