Last year, the number of independent workers in the U.S. increased dramatically, regardless of the frequency of work. In 2023, there were roughly 36.6 million occasional independent workers in the United States, an increase from 15.8 million in 2020.
With this increase, New York small business owners need to understand the difference between an independent contractor and an employee, especially the criteria used for proper taxation and compliance with state and federal laws.
Employers may want to opt for an independent contractor as it lets them avoid the costs associated with employees, such as taxes, training, overtime pay, benefits, and workers’ comp insurance, to name a few. But here’s the most important thing: You must be certain that these independent contractors are, in fact, independent. There are severe consequences if you violate the law and misclassify an employee as an independent contractor. Intentional misclassification can result in criminal charges, penalties of up to $1,000 per worker, and the repayment of back wages and interest.
With that in mind, let’s look more closely at independent contractors.
Who is an Independent Contractor?
An independent contractor is a self-employed individual who provides goods or services to a business for an agreed-upon cost. There’s no employment agreement, the person isn’t on your payroll, and you don’t withhold taxes from their earnings.
But you can't just say that a person’s an independent contractor based on a contract to do work for you. The difference between an employee and an independent contractor depends on the level of control and independence the worker has in your business relationship. The IRS has created guidelines to help businesses with this determination, and 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."
To evaluate control, business owners should examine the specifics of the business relationship in these categories:
Behavioral: Do you control what workers do and the way they do it? For instance, do you require him or her to work on-premises or during business hours?
Financial: Do you control the financial aspects of their job? For example, do you reimburse this worker for expenses? Can they control their profits and losses and pursue other financial opportunities while doing your job? If so, they’re probably independent contractors.
Relationship: Do you provide them with benefits like paid vacation or insurance? Is the relationship for a specific time or project? These factors can indicate an employer-employee relationship.
The IRS says that there’s no exact number of factors that reach the threshold of independent status. Instead, employers must look at all of these factors in the context of the business relationship. However, the more you control, the more likely you’re hiring an employee, not contracting with an independent worker.
What are the Rights of Independent Contractors?
Business owners who hire an independent contractor should know the rights associated with these agreements. Independent contractor rights include the following:
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The right to a contract;
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The right to control their own work;
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The right to make decisions on their own behalf;
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The right to determine where and when they work;
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The right to advertise services to others;
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The right to be paid;
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The right to work with other contractors; and
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The right to manage their own business as they see fit.
Takeaway
The gig economy is here to stay, and independent contractors will continue to be a large part of business going forward. Make sure you have a written independent contractor contract. This not only details the terms of your agreement, but it’s evidence of the business relationship intended.
Before you hire an independent contractor, make sure your business relationships are correctly classified. Contact us and speak to an experienced New York small business attorney. We help business owners like you every day at the LOVE LAW FIRM. You don’t want to make a mistake on this important distinction. It can literally cost your company tens of thousands of dollars.
If you liked this article, check these out as well:
Risks When Classifying Employees and Independent Contractors in a Gig Economy
Employment Law Basics for New York Small Businesses
Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM, PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
