Are you an Independent Contractor (or Employee)?
With the gig economy, sharing economy and freelancers seemingly being the largest demographic of work in the United States and around the world, there has been a lot new services that blur the lines between how a person is considered an Employee or as an Independent Contractor. How are you classified and how this affects your income tax and your ability to obtain employee benefits?
With new online services being created everyday and increasingly become more widespread, local, state and national governments in the U.S. and abroad have had to address how they deal with these new sharing companies deal with their people they hire to help them succeed.
The prime example of this is Uber. Uber has had to deal with regulatory agencies in classifying their drivers as either an employee or a contractor. At the end of the day there is a lot at state as taxation, employee benefits including pensions, workplace insurance etc. add up a lot in hourly or year salary wages. In the end, Uber won the case that the drivers they hire are independent contractors, but this line is blurry at the best of times and is increasingly blurrier with the sharing economy of services like Uber and AirBnB.
What is an Independent Contractor anyway?
So while Uber drivers in the U.S. remain classified as independent contractors, it’s also good for us freelancers to know which side of the line you are on for your own benefit and to know how to deal with the situation when you have a contract in front of you or during tax season.
First, let’s take a look one of the official sites for this information — the IRS. On the IRS page for Independent Contractors, it states that this is the primary distinction for being an independent contractor:
“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.”
This is a very packed sentence so let’s break it down into their pieces. An Independent Contractor is classified as such if:
- Can have autonomy on what to do to get the job done
- Can have autonomy on what it is that needs to be done
- The paying client can hire a person, but only have a say in the results of the work
I don’t know if it’s just me, but it’s very vague and also very abstract. The IRS did give some typical examples of independent contractors such as dentists and other specialty doctors and lawyers. And it did also say that the consideration for classification is taken on a case-by-case basis, so it really needs to understand the above by examining the details.
Some questions that might uncover your employment status
The IRS definition is very high-level, abstract and isn’t helpful as more details need to be required to determine if you are indeed an independent contractor. So some other set of questions needs to be asked in order to help you understand a bit more what are the boundaries and where is the grey area.
Here are some questions to ask yourself as you do a self-assessment:
- Do your paying client supply you with your work tools/materials (e.g. computer, notebooks, mobile phones, wireless services, pens, paper)?
- Does your paying client cover your expenses? Typical ones include travel (flight, hotel, meals).
- Does your paying client ask you work in a particular site? If so, is it for a typical workday (9-to-5) and is it for the typical work week (Monday to Friday)?
- Does your paying client pay you in regular amounts and regular intervals (i.e. twice-monthly, monthly or bi-weekly paychecks)?
Answering ‘Yes’ to these questions doesn’t mean you are an employee, but the more questions that are Yes does lead you to be more likely to be considered a employee rather than an independent contractor. These are just helpful checklist to use to start your own journey into thinking about this issues and how it can affect your personal taxes. Consider having CPA or Certified Accountant or equivalent to support you in this analysis.