An individual is an independent contractor if the payer or client has the right to control or direct only the result of the work and not how it will be done. The earnings of an independent contractor are subject to self-employment tax.
The Internal Revenue Service Common Law Rule (IRS: a governmental agency) determines the factors about who is an independent contractor or an employee. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done).
Here are examples of employees vs. contractors:
- Where you work: independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
- Method of payment: hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
Wage and hour laws, workplace safety laws, and retaliation laws protect employees but not independent contractors. In California, willful misclassification of workers can result in civil penalties, between $5,000 and $25,000 per violation.
More information about these guidelines can be found in the IRS Employer’s Supplemental Tax Guide (Publication 15-A).