Independent contract work, the so-called “gig economy,” has experienced massive growth—propelled forward by the pandemic. After all, why rely on an office and traditional job when the internet and other advancements in technology have made it much easier to work for yourself? This is the mindset of freelancers and contract workers—who may also appear as an attractive hiring option for employers.
Hiring freelance workers or independent contractors does offer several advantages. Since they aren’t traditional employees, employers aren’t required to pay taxes on their wages or provide benefits. Plus, contact workers are usually hired for a specific project or time period, and their contract ends once this time is up. Altogether, hiring contract workers can result in significant savings on labor costs for an employer. However, employers have specific tax considerations when bringing contract workers on board.
Tax considerations related to contract workers
One hurdle employers can run into when it comes to employing contract workers is how they are classified come tax time. It’s important for contractors to be classified as such and for employers to submit a 1099 tax form for every contractor who was paid $600 or more during the tax year. Failure to classify contractors correctly and submit 1099 forms can result in hefty legal fines, including back taxes on each individual, plus interest calculated from when the tax payments were due. Employers can also receive penalty fines and be required to pay retroactive employment taxes, such as Medicare and Social Security.
Who is considered an independent contractor?
In general, an independent contractor could be someone whose work is controlled by an employer. However, the contractor determines the means by which the work is accomplished. They are not supervised by the employer and their work is not monitored as an employer would monitor the work of an employee. Plus, an independent contractor provides their own tools and supplies used to complete their tasks or assignments.
Independent contractors and freelance workers could be any of the following:
- Graphic designers
- Business and management consultants
- Interior decorators
Have questions about employment rules or need to assess your business risk?
To understand more about tax requirements and employment laws, it helps to consult and expert. It also helps to understand what other risks your business may face. To learn more, contact Odell Studner.