Awhile back I replied to a Craigslist posting for a “Fast Paced Virtual Assistant Needed.” The business owner was crystal clear that she wanted the person she chose to be a self-employed independent contractor, NOT an employee. That means she would pay me a contracted rate in exchange for my services – no taxes withheld, no benefits; just the rate.
Fine with me. That’s how I operate as a virtual independent contractor.
Then she went on to tell me:
- the hours I needed to be available,
- that she would train me on exactly how I needed to do the job,
- the amount she was willing to pay per hour,
- and if it worked out, it would become full time and she would pretty much only want me to work for her.
As a self-employed independent contractor.
Whoa, mama. Something just went south.
What’s wrong with this picture? Nothing – IF she were hiring an employee. But she wasn’t.
And that’s a BIG problem.
Don’t take my word for it. Let’s ask the IRS.
(That’s the Internal Revenue Service, for those of you not from these parts.)
“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.
“You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”
Why is this a big deal, you might ask?
“The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.” -IRS
Advice from the U.S. Small Business Administration (SBA) directed toward the business doing the hiring:
“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.”
In plain English, it’s a big deal because:
- If they’re treating you as an employee but paying you as an independent contractor, you’re paying more taxes than you should.
- You’re also missing out on employee benefits like health insurance and retirement.
- If you’re a self-employed independent contractor, that means you run your own business. They shouldn’t dictate the hours you work, whether or not you can work for other clients, or how to do your job.
- There are legal consequences for their company if you are misclassified.
The important part is that you’re fully aware of the difference and being classified (and paid!) accordingly.
So when you’re searching for a gig, what should you look for in the posting to see if it’s an employee or independent contractor position? Here are a few key differences so you know what to look for.
If you are a business owner or independent contractor who provides services to other businesses, then you are generally considered self-employed. If you want to read more of the nuances, click on the “Show More” button below to get the full scoop from the IRS.
“Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.
There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.”[/su_expand]
If you’d like to read more, there was a GREAT article posted a few days ago on Entrepreneur.com, “Think Twice Because Your Freelancer Might Legally Be An Employee.” It lays the whole thing out in more detail.
Do you work as a virtual employee or an independent contractor? Neither one is bad; you just need to understand the difference and know what you are. Like anything, both ways have pros and cons. I hashed that out a bit in this post.
What questions do you have about being an independent contractor vs. employee?
Chances are someone else does too, so share in the comments below.
If I don’t know the answer I’ll help you find out!
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