Studies suggest hiring independent contractors can save as much 35% on payroll costs. When hiring independent contractors, the employer is relieved of paying federal and state payroll taxes.
Additionally, employers no longer need to provide workers compensation insurance for the independent contractor. Depending on the type of work, this can add a great deal to the cost of hiring employees. Retaining independent contractors avoids all these problems.
The issue of employee versus independent contractor comes up in several forums. The government likes to classify everyone as an employee forcing the employers pay the payroll taxes. For the same exact reasons, employers like to hire independent contractors and avoid paying the payroll taxes. Once individuals are classified as employees many employment related laws immediately apply raising the cost.
The issue also appears when an independent contractor is insured on the job and seeks compensation and medical care. Classifying someone as an employee opens the door for the employers workers compensation policy to cover the otherwise independent contractor.
The legal definition turns on the control an employer exerts over the employee or independent contractor. The more control the more likely the individual be an employee. IRS uses a 20 prong criteria:
1. Is the worker required to comply with instructions about when,
where and how the work is done?
2. Is the worker provided training that would enable him/her to
perform a job in a particular method or manner?
3. Are the services provided by the worker an integral part of the
4. Must the services be rendered personally?
5. Does the business hire, supervise, or pay assistants to help the
worker on the job?
6. Is there a continuing relationship between the worker and the
person for whom the services are performed?
7. Does the recipient of the services set the work schedule?
8. Is the worker required to devote his/her full time to the person
he/she performs services for?
9. Is the work performed at the place of business of the company or at
specific places set by the company?
10. Does the recipient of the services direct the sequence in which
the work must be done?
11. Are regular oral or written reports required to be submitted by the worker?
12. Is the method of payment hourly, weekly, monthly (as opposed to
commission or by the job?)
13. Are business and/or traveling expenses reimbursed?
14. Does the company furnish tools and materials used by the worker?
15. Has the worker failed to invest in equipment or facilities used to
provide the services?
16. Does the arrangement put the person in a position or realizing
either a profit or loss on the work?
17. Does the worker perform services exclusively for the company
rather than working for a number of companies at the same time?
18. Does the worker in fact make his/her services regularly available
to the general public?
19. Is the worker subject to dismissal for reasons other than
non-performance of the contract specifications?
20. Can the worker terminate his/her relationship without incurring a
liability for failure to complete the job?
At the end though, there is no particular factor that may sway it one way or the other.
For years, FedEx hired 12,000 drivers on their Ground Div as independent contractors. NY, NJ, and MT threatened to sue if FedEx did not reclassify them as employees. But the IRS reversed itself and decided no to charge FedEx over 300 million in taxes and allowed FedEx to classify the drivers as independent contractors.
While the issue of hiring an employee or independent is a tricky one, using common sense is really the best way to evaluate it. By hiring individuals as independent contractors when appropriate, companies can save a great deal. But the pitfalls of such decision may be haunting when facing the tax man.