Hiring Independent Contractors
Many small businesses rely on independent contractors for their staffing needs. There are many benefits to using contractors over hiring employees: savings in labor costs, reduced liability, and flexibility in hiring and firing.
However, in legal terms, the line between an independent contractor and an employee is not always clear. Your workers are not independent contractors because you say they are.
The distinction between employee and independent contractor is important, since it affects how you withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes. In addition, misclassification an individual as an independent contractor may have a number of costly legal consequences. If your independent contractor is discovered to meet the legal definition of an employee, you may be required to
- Reimburse them for wages you should've paid them under the Fair Labor Standards Act, including overtime and minimum wage
- Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare, and unemployment
- Pay any misclassified injured employees workers' compensation benefits
- Provide employee benefits, including health insurance, retirement, etc.
Here you will find resources to help you understand taxation and other requirements when employing independent contractors, and the distinction between employees and contractors.
Tax Requirements
- Independent Contractor or Employee?
This IRS guide for employers explains how to determine if your workers are employees or independent contractors for federal tax purposes. - Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding
Business owners may file Form SS-8 to the IRS to request a determination of the status of a worker for purposes of federal employment taxes and income tax withholding. - The Employer's Supplemental Tax Guide
This IRS tax guide has detailed guidance on the distinction between independent contractors and employees.
Employment Information
- Employment Relationship Under the Fair Labor Standards Act
Legal basis for determining whether or not a work is an employee or independent contractor. - Joint Employment and Independent Contractors Under the Migrant and Seasonal Agricultural Worker Protection Act
Answers to frequently asked questions concerning independent contractors and joint employers under MSPA - Equal Employment Opportunity Laws - Who's Covered?
Info on how to determine whether a person is an employee or an independent contractor and which are covered under federal equal employment opportunity laws.