Did you know that over 51 million Americans are independent workers?
In our booming “gig economy,” more and more people are making the transition from traditional employees to independent contractors. While this offers freedom and flexibility to the worker, it can pose challenges to companies that want to hire them.
What do you need to know about contractor law? How can you ensure your bases are covered with a 1099 employee? Keep reading below as we explore the important topic of IC compliance.
What Is IC Compliance?
An independent contractor (or independent worker) is anyone who falls outside the spectrum of a traditional employee. This includes gig workers, consultants, entrepreneurs, and freelancers. It also includes contract workers through organizations like Innovative Employee Solutions.
IC compliance refers to a broad set of guidelines and regulations that protect an independent worker’s rights. Any employer or organization that chooses to work with independent contractors must abide by these rules.
Sounds easy, right? Not exactly. The challenging part of IC compliance is that rules and regulations differ by area.
For example, what’s legal in California may not be legal in Arizona. And what’s legal in Los Angeles may not be legal in San Diego. Every state, county, and the city can set and enforce its own laws about employees and contractors — which can become a logistical headache for employers.
Employee vs Independent Contractor
So, how do you know if the person you’re hiring is classified as an employee or an independent worker?
The most obvious difference lies in taxes. When you hire an employee, they fill out a W-2 form. You, the employer, automatically deduct taxes from the individual’s paycheck and report their earnings to the IRS.
An independent contractor, on the other hand, fills out a 1099 form. They have the sole responsibility to calculate, report and pay their own taxes to the government. Their “employer” does not handle any tax withholding or reporting for them.
Another key difference lies in job security. An employee is protected against discrimination and job loss without reasonable cause. They can also file for unemployment benefits if they do lose their job.
Independent workers are not entitled to these benefits.
What Employers Need to Know
By law, any company or organization that pays more than $600 in a calendar year to an independent contractor must report this to the IRS. They do this on the previously mentioned 1099 form. Failure to do so can result in fines and penalties for noncompliance.
Why is this so important?
Again, it gets backs to taxes. While employees have taxes withheld by their employer, independent contractors do not. Correct classification of workers is vital to protect both the employer and the independent worker(s) they hire.
Contractor Law 101: Class Dismissed
There are many benefits to contractor work, but you need to do your research before hiring any 1099 employee. Review the laws for IC compliance in your area to ensure everything you do is “by the book!”
Now that you’re well-versed in contractor law, what comes next? Keep browsing our site for more helpful business advice and insight.