When searching for a job, the two main employment avenues available are getting employed with a larger company or doing independent contracting. It is necessary and expected of workers to understand the distinctions between the various worker classifications recognized by both California and the IRS. Understanding these differences, as well as the legal factors that define each, is essential when preparing for tax season.
What Is an Independent Contractor?
Independent contractors are professionals who act as their own employers. They are compensated for their work on a project-by-project basis. They can typically accept freelance employment and work on many projects at once. Independent contractors frequently have much control over their work environment, hours, and methods of finishing their tasks. When filing their taxes, independent contractors often have to self-report their earnings. They must also pay taxes separately from the company that hires them.
Independent contractors do not have many of the legal privileges that employees have for protected labor rights. Pay rates, break times, and the use of the minimum wage for company employees are all mandated and legally protected by national labor laws. For independent contractors, their ability to build their schedules allows them to take breaks when they desire. However, they do not have a financial safety net for payment. Compensation can often fluctuate based on their projects or field.
Differences Between Independent Contractors and Employees
When hiring workers, businesses can hire both independent contractors and employees to execute necessary work functions. Depending on the type of work needed, either employees or independent contractors may be more useful. Understanding the differences between the two is necessary when making that final decision. The biggest differences between independent contractors and employees include:
- Tax Filings: When filing taxes, an employee will receive a W-2 or W-4 that outlines their yearly earnings and the amount of taxes owed for their wages. Each paycheck lists an amount of money withheld for certain taxes, such as social security taxes, income taxes, etc. Independent contractors, however, will be expected to self-report their income listed on a 1099 form. This includes calculating their tax rates and deductions.
- Protection From Labor Laws: The Fair Labor Standards Act does not recognize independent contractors as employees. Therefore, it does not apply the Act’s wage and hour regulations to them. Typically, an independent contractor’s pay is determined by the terms of their agreement with the employer. However, other protected activities under national labor law, like joining a union, are still available to independent contractors.
- Hiring and Onboarding Procedures: When seeking work as an employee, an application is sent in about a job offer. This leads to contact from the company regarding the position, followed by information gathering and certification as an employee. Independent contractors, on the other hand, are contacted directly about their services. Information about the prospective job and compensation are included in their contract.
- Payment for Services: Employees and their employers are bound by set paydays when administering payment for services. Independent contractors are usually paid when their services are requested.
When hiring workers, employers have the option of listing them as either independent contractors or employees, using an explanation of their relationship to justify either label. For example, if a worker is hired for full-time, salaried work and their employer is withholding payroll taxes from their checks, they would be considered an employee. However, if the worker is contracted specifically for their services and is paid a set fee for their work, they would be considered an independent contractor. If an employer were to improperly classify an employee as an independent contractor instead of an employee, they could face increased tax rates or fines from the IRS.
Q: Is California banning independent contractors?
A: Instated in January 2020, Assembly Bill 5 (AB5) was used to drastically reshape and reclassify California’s worker classification system. This redefines what it means to be an independent contractor or an employee. Employers must pass the Dynamex ABC test or Borello multi-factor test when naming independent contractors. Employers could face legal pushback for misclassifying their workers. Independent contractors can still work and file taxes in California. However, they must strictly follow these guidelines to file their taxes properly.
Q: What new law in California has changed how an independent contractor is defined?
A: California’s Assembly Bill 5 (AB5) has introduced stricter guidelines for worker classification. Using the ABC test outlined in AB5, to prove that a worker is an independent contractor, an employer must show that the worker is:
- Not subject to control or direction while providing their services
- Performing their work outside of the hiring company’s normal course of business
- Often working in a separately established trade, occupation, or business.
Q: What are the new labor laws for 2023 in California?
A: Starting January 1st, 2023, all businesses in California must pay their employees a minimum wage of $15.50 per hour. Additionally, agricultural businesses with 25 or fewer employees are required to pay their workers overtime after 9 hours each day, or 50 hours a week. Since January 1, 2022, major companies with 26 or more employees have been required to pay overtime to agricultural workers after 8 hours in a single day or 40 hours in a week.
Q: Do California labor laws apply to independent contractors?
A: Labor laws are used predominantly to protect employee rights by holding employers accountable for enforcing fair standards and practices. Some labor rights are also available to independent contractors. For example, just like employees, independent contractors are allowed to join unions. They can also ask for a state or federal review of their employment situation if they believe they are being misclassified as independent contractors.
Seeking Legal Help for Independent Contractor or Employee Tax Filing
When filing taxes, understanding the differences between independent contractors and standard employees is essential to completing the process successfully. With the help of an experienced tax attorney, any questions regarding the filing process for either independent contractors or employees can be properly addressed and handled before submitting any income to the IRS. At Coggins Law, we can help with any tax filing. Visit our website and contact us today to request more information.