Everything You Need To Know About Contract Labor Law, Rules, and Taxes

Before we dive into the world of contract labor law imagine working for yourself doing what you love at your pace and not answering to anyone else. It sounds like the American dream, right? Well, that’s called being a contract worker. Almost 7% of workers in America right now are self-employed as independent contractors. This essentially means that they work for themselves instead of a corporation. It can start small with a couple of clients then grow into an entire business. Contract labor can be a confusing topic, but we’re here to make the subject more transparent.

There are a lot of unique rules and laws associated with being a contract worker. First, there are specific laws to help determine whether you are an independent contractor or employee. There are also certain rules employers must follow depending on how you are labeled. There are also huge differences in the way that you pay taxes. Here is a guide over everything you need to know about the rules and laws regarding being a contract worker.

What is an Independent Contractor?

It’s important to clarify the difference between a contract worker and an employee. An employee must work when the company schedules them, they are on the regular payroll, they get benefits from the employer, and they generally work on-site for one employer. An employee will sign a W-2 tax form when hired.

On the other hand, independent contractors work when they want, they get paid by the job, they don’t receive benefits, and they can usually work from home for multiple clients. An independent contractor will sign a 1099 tax form when contracted to do a job.

Some common examples of independent contractor jobs include:

• Accountant
• Barber/ hairdresser
• DJ
• Lawyer
• Photographer
• Real estate agent
• Security guard
• Taxi driver
• Tutor
• Writer

It’s important to remember that these are just examples. There are plenty of other professions where someone might be an independent contractor. There are also situations where people in the above-mentioned professions could be employees.

There are times when your employment status may not be especially clear. You might initially sign a contract but end up an actual employee after multiple extensions of the contract and being assigned more and more work. According to the IRS, you may be a full-time employee if you work more than 130 hours a month. This can get trickier if you are not paid by the hour.

If you believe that your employment status is mislabeled, be sure to talk to your employer to get it corrected. If you don’t, you won’t get the benefits of being an actual employee. If you meet the criteria of a full-time employee but your employer refused to acknowledge you as an employee, talk to an employment lawyer today to look into your options.

Benefits of Hiring an Independent Contractor

There are a number of reasons companies opt to hire independent contractors instead of a standard employee:

Less Expensive

Independent contractors are 20 – 30% less expensive than regular employees. This is because the employer isn’t responsible for health insurance or other costs, such as training. Training requires a lot of time. Plus, the company has to pay the trainer. A contract worker generally comes already trained in their skill.

Perfect for Temporary Jobs

Sometimes an employer has a job that needs to be done without the need for a permanent hire. Hiring a contract worker provides flexibility and lower payroll costs. After the job is done, both parties can part ways until there is more work.

Less Paperwork

Hiring an employee requires a lot more verification than an employee. It varies based on the company, but in many situations, you won’t need to do as much work to get a contract worker started compared to an employee.

When tax season comes around, it’s significantly easier for a company to handle a contract worker than a standard employee since the company doesn’t have to pay FICA taxes on those employees.

Disadvantages of Hiring an Independent Contractor

While there are plenty of advantages to hiring a contract worker, there are some disadvantages, too.

Finding Good Freelancers

As every employer knows, it’s important to hire the right person for the job. If you don’t, it could end up costing the organization money. When you hire an employee, you establish a relationship with them. You might not establish the same relationship with a contract worker. The next time you need them, they might not be available. That means that you may have to find another person. This requires you to take time to find the employee instead of doing other things you need to be doing. There’s also the chance that the employee won’t fit for the position. Unfortunately, you might find that out a little too late.

Potentially Lose Copyright

When an employee for a company creates something, it’s understood that the creation is the property of the company. When an independent contractor creates it, the contract could state that they own the copyright. That limits the profit you can make on the creation you hired someone to make. It may also limit the capacity in which you can use the product.

Risk of an IRS Audit

If you have a large number of employees labeled as independent contractors, the government might think that they are mislabeled since the company doesn’t have to pay taxes for independent contractors. If they think that employees are being mislabeled, they will likely run an audit. An audit is, at the very least, a huge headache for the company. It will likely be an expensive headache. If anything serious was going on, it can have devastating results. Most companies want to avoid an audit at all costs, so they may limit the number of contract workers they have on the team.

Possibility of Getting Sued

A contract worker is not covered by worker’s compensation. That means that if they get injured on site, they may be forced to sue the company to get compensation. Not being covered means that your company would have to pay the entire settlement. In some situations, this could ruin the entire company.

When To Hire An Independent Contractor

Now that we’ve gone over what the advantages and disadvantages of hiring a contract worker are, it’s time to go over when you should hire an independent contractor. The first and most obvious time to hire a contract worker is when you only need a single job done. If you only need a logo design for your company, you don’t need to keep the person on your payroll after the logo is done. Similar to construction jobs. Once the job is done, there’s no additional reason to keep them employed.

Another time you want to hire a contract worker is when the work doesn’t necessarily relate to your actual business. This could be something like hiring a maid service to clean your office. You could put someone on the payroll, but you can also hire someone on a contract basis.

Finally, you may want to try an employee out before you hire them full-time. Hiring the potential employee on a contract basis gives you the opportunity to see how they will approach the job. From there, you can determine if you’d like to move forward or not. This helps prolong the extra work and cost of a full-time employee until you are absolutely sure.

Benefits of Being an Independent Contractor

Employers aren’t the only ones who benefit from being independent contractors. There are a number of reasons that a person would choose to be a contract worker.

Stay at home

Most contract jobs stay-at-home jobs. For most people, it’s not a big deal to go to work in the morning. Many people don’t have this luxury. Many of us don’t even realize this is a luxury. However, some people aren’t physically able to get up and go to work in the morning as easily as others. If someone has a physical disability, they might prefer to work from home. They may feel safer and have the accommodations that they need.

Additionally, new mothers may enjoy the option to stay at home to care for their young children while still making a living. Unfortunately, a lot of mothers go back to work right away after giving birth to afford the things they need for their new baby. As an independent contractor, you can stay at home and work while your children color and play. Why pay for daycare if you don’t have to? It’s expensive, and you have to be away from your child.

Pick How Much You Work

Even if you have a contract job that requires you to go on site, being an independent contractor gives you the opportunity to choose exactly how much you work. When you have the availability to work more, you can do so.

Do What You Love To Do

As an independent contractor, you have the freedom to do the work you love. Instead of spending your days doing menial tasks for someone else, you can build your own company and choose the work you want to do. The more your business grows, the more freedom you will see. At first, you may not have the selection of work you’d like. As you get better at your craft and build your portfolio, the more options you will get.