What is an Independent Contractor and Why It Matters

Employers and HR teams — here are important details you should know about independent contractors, including their tax classification and impact on your company’s time and costs.

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Are you prepared to hire independent contractors?

It is important for employers to know what an independent contractor is and the rights that are unique to their role.

The IRS explains the term “independent contractor” by stating “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

In other words, an independent contractor is a self-employed worker whose work is not dictated by an employer.

Some examples of independent contractors are dentists, lawyers, content writers, and security consultants. Being self-employed allows those independent contractors the opportunity to transfer their skill set to jobs in which they have control over aspects of the position that employees wouldn’t have. For example, an independent contractor can have more autonomy over vacation days or sick leave.

It’s important that HR teams understand the terms of an independent contractor and how to properly post open positions. Here is why knowing what an independent contractor is matters.

Are independent contractors more cost-effective?

Independent contractors are becoming a very popular option for companies, and the biggest reason is that in many cases the bottom line is cheaper.

Independent contractors are becoming a very popular option for companies, and the biggest reason is that in many cases the bottom line is cheaper. Companies are finding that the cost-effectiveness of hiring independent contractors as opposed to traditional employees is well worth it.

Not only are HR departments saving the company the investment of things like office space and supplies, they’re also saving a substantial amount in other areas like:

  • Employee health insurance plans
  • Matching 401k contributions
  • Dental and vision insurance
  • Paid time off (vacation, sick leave, and bereavement)
  • Worker’s compensation insurance

If your company is aiming to save money in the wake of COVID-19 or even remain above water by keeping processes streamlined and hiring independent contractors, keep reading. It’s important to realize that not all contractor positions are the same. In some instances, hiring an independent contractor may cost your company more. Here are a couple of reasons why.

Pro Tip: Be cognizant of any third-party fees. If your company plans on going through a hiring agency to scout independent contractors, then be aware of the fees that can come with the process.

If your company plans on going through a hiring agency to scout independent contractors, then be aware of the fees that can come with the process.

Can an independent contractor save your business time?

Background checks, formal in-person training, legal retainers, and even time HR departments spend for new hires can be expensive. Depending on the infrastructure of your company and the nature of your business, all of the above can be avoided by bringing on an independent contractor. Not only do you save money, but time as well. Training time alone costs the company HR hourly or salary wages and physical training materials such as venue rental, booklets, etc.

Do the calculations of your business’s budget carefully before assuming that independent contractors will save money. Evaluate if you are best meeting the goals of your business utilizing several independent contractors or by investing in the employment package of a solo employee.

Independent contractors and liability

Tax classification

Proper tax classification for independent contractors is incredibly important. Independent contractors will need to be provided with a 1099-MISC tax form to document what the company paid them. They are also responsible for withholding their own taxes and filing each year.

It is also the company’s responsibility to stay updated on state laws regarding independent contractors and the tax requirements.
It is also the company’s responsibility to stay updated on state laws regarding independent contractors and the tax requirements. For example, California recently reformed their independent contractor laws to better protect those in the gig economy. You can read their outlined changes here as an example to keep in mind as your company draws up legal documents for independent contractors.

Nature of the working agreement

It’s vital to clearly outline the parameters of the working relationship when adding an independent contractor to your team. As mentioned above, the nature of the working agreement with independent contractors is much different than a working employee agreement. The agreement should include, but not be limited to, outlining the following details:

  • Duration of the project
  • Compensation
  • Pay cycle
  • Primary responsibilities for the project
  • Primary means of communication during the project

Companies and independent contractors alike should be in sync with the outlined duties and expectations of the project. Independent contractors will normally present their client with a contract to sign and vice versa.

Wrapping up

Having a clear understanding of what an independent contractor is matters because it forms the foundation for a proper working relationship. Your company and the independent contractor will have protection with an unfaltering understanding in place. Make sure that contracts for independent contractors outline tax specifications and project expectations.

Zenefits can help manage independent contractors with the same ease as employees. Our platform allows companies to properly classify those on their teams and compartmentalize departments by duties and titles. Check out our HR management options here.

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