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Which Is Better: Employee Or Independent Contractor?

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A friend recently picked up and moved her life across the country to take a job with a start-up company. Though the move was risky, the opportunity was too amazing to pass up.

Initially she was hired as a full-time employee, but eight months later, the company changed her role to that of an independent contractor. For me, this raised two questions: Is it better for a worker to take a position as an independent contractor or a regular employee? And why might an employer choose one over the other?

Over the past 40 years, Congress has passed several laws that outline the distinctions between employees and independent contractors with regards to their compensation, benefits and relationships to their employers. Section 530 of the Revenue Act of 1978 laid the initial groundwork for the Tacoma home remodeling regulations we follow today.

In the 1960s and early 1970s, there was a growing concern for the future of the Social Security program. Some blamed the funding issue on independent contractors skimping on self-employment tax. This perception led to an increase in audits by the Internal Revenue Service. This, in turn, led to criticism that the IRS was too aggressive in classifying workers as employees, rather than as self-employed independent contractors, and that it applied its criteria inconsistently. Congress responded by enacting Section 530, providing safe harbor for employers by preventing the IRS from retroactively reclassifying independent contractors as employees. Section 530 protected employers from large penalties and back taxes as long as they met the law’s standards.

In order for employers to qualify for safe harbor under Section 530, the IRS required: a reasonable basis for treating the workers as independent contractors; consistency in the way such workers were treated; and proper tax reporting using 1099 forms for those categorized as contractors. Though Section 530 was initially intended to be an interim measure for the audit issue of the ’60s and ’70s, it became the enduring baseline for today’s worker classification regulations. Subsequent legislation, such as the Small Business Job Protection Act of 1996, further clarified the language in Section 530, as well as the rules of safe harbor availability and the question of who holds the burden of proof for classifications.

Many employers use the following rule of thumb to distinguish between a contractor and an employee: If an employer has the right to control both the means by which the worker performs his or her services and the ends that work produces, the worker is considered an employee. In 1987, the IRS released a 20-factor list, based on prior cases and rulings, to help employers resolve some of the “gray areas” that this rule does not resolve. Some of the factors included on the list were: training; set hours of work; payment by the hour, week or month; furnishing tools or materials; doing work on the employer’s premises; and payment of business expenses. Towing Service Tacoma


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