It is to the employer’s benefit, and usually to an employee’s detriment, to characterize an employee’s employment relationship as that of an independent contractor or consultant. Among other things, such a characterization saves the employer payroll taxes, its share of social security contributions, and the cost of providing employees with benefits. In addition, various laws that protect full time employees may not apply to those characterized as contractors.
However, characterizing employees as independent contractors in their agreements or personnel files, and paying them on a 1099 basis does not mean such individuals are, legally, independent contractors. The courts and the IRS look at a large number of factors in determining whether an employer has mischaracterized an employee as an independent contractor. The primary factor centers on the issue of control. Some of the questions to be answered to determine an employees true status include: Does the employer control the place, time and manner of the contractor’s work? Does the employer require the contractor’s presence in the office while the work is being accomplished? Does the contractor report to an employer manager or have employer employees reporting to them? Can the contractor simultaneously provide services to another entity? Is the contractor working on a discreet project with a time limit on its completion?
In many instances, independent contractors are really W-2 employees who are losing out on employer benefits and the protection of the law while paying an extra 6.5% in taxes on the first $110,000 they earn. The question to ask is whether the benefit derived from being an independent contractor outweighs the benefit of being an employee.