This two-page form does exactly what it says it does—it helps you report the profit you made or losses you took from your business this year (hopefully you made a nice profit!). It’s also where you’ll report your business expenses and claim any deductions to help ease the pain of filing. For many contractors, especially those in creative, design, or technology fields, the intellectual property (IP) they create is a primary asset. If your work involves handling sensitive client data (e.g., personal information, financial records, trade secrets), you have a responsibility to protect it.
Contractors are hired for the final result and therefore should not be asked for progress or interim reports. If they work on the premises of the hiring company, it is not under that company’s direction or supervision. The agency has not been enforcing the 2024 rule and will consider a new one, using pre-2024 standards in the meantime. In addition to changing the classification criteria, SB 6 proposes severe penalties for misclassification, including possible imprisonment and substantial fines. The bill has not advanced in the Michigan Senate and currently remains stalled.
Independent contractors, by comparison, typically have more autonomy, including the opportunity to work for multiple companies, set their own schedules, and negotiate terms and compensation. If you’re treated like an employee, you should be classified like one by the business you work for. On the other hand, if you want to be an independent contractor, taking these steps will help solidify your status as one.
If you require legal or professional advice, kindly contact an attorney or other suitable professional advisor. SB 2296 established a new rule making workers who operate certain vehicles are classified as independent contractors instead of employees effective July 1, 2021. When a company hires someone as an independent contractor, they must ensure the person is properly classified. The IRS, Department of Labor (DOL), and state laws each have different factors for determining if a worker is an employee or an independent contractor. Understanding your legal rights as an independent contractor can help protect your business and build positive client relationships. This article explains 10 key legal rights and provides additional details to keep you informed.
Know your rights
- Contractors can’t be fired so long as they produce a result which meets the contract specifications.
- In Colombia, employees are entitled to vacation, social security, and other benefits.
- As the number of freelance workers in the U.S. workforce steadily grows, and as companies increasingly rely on independent contractors to supplement their workforce, the risk of misclassification increases.
- This guide will walk you through the key legal aspects of being an independent contractor in the United States, from correctly classifying your work status to enforcing contracts and protecting your valuable intellectual property.
- Any legal analysis, legislative updates, or other content and links should not be construed as legal or professional advice or a substitute for such advice.
The laws that apply to independent contractors vary by state, so working with a professional can help to ensure compliance with all applicable rules and regulations. One of the most significant responsibilities of an independent contractor is managing your own tax obligations. Unlike employees who have taxes withheld from their paychecks, contractors receive gross pay and are responsible for paying their own income tax and self-employment taxes to the IRS. A meticulously drafted independent contractor agreement is your most crucial legal protection.
These factors help determine whether a worker is an employee or an independent contractor for federal tax purposes. While no single factor is decisive, the overall picture painted by these factors is key. If an employer-employee relationship exists (regardless of what the relationship is called), then you are not an independent contractor and your earnings are generally not subject to self-employment tax. However, your earnings as an employee may be subject to FICA (social security and Medicare tax) and income tax withholding.
Unemployment insurance
- Failing to carry appropriate insurance can expose your business and personal assets to significant financial risk in the event of a lawsuit, accident, or other unforeseen event.
- Contractors are hired for the final result and therefore should not be asked for progress or interim reports.
- If you’re looking for more resources to help you become an independent contractor or small business owner, visit MBO’s blog for expert insights.
- Carefully read the contract before signing it, ensuring that all your key points are clearly outlined.
- This will ensure that you get proper remuneration for your work and outline any potential issues with taxes, filing deadlines, and other related matters.
This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Independent contractors must perform work that is not part of the usual course of your business. Like the common law test, the painter who was hired by a restaurant to paint the walls would also be considered an independent contractor under this test. If any of the following controls are involved, the worker is considered independent contractor rules of thumb an employee, and you are not engaged in an independent contractor relationship.
This ability to diversify your client base is a key aspect of being in business for yourself. The IRS safe harbor does not apply to state taxes and withholding, worker’s compensation, etc. Additionally, the 2021 rule allowed employers to mandate the use of speed limiters with independent contractors, but the 2024 provided no concrete examples on the matter. If you are considering an engagement with an independent contractor who resides in Colombia, it is important to understand how Colombian law treats the independent contractor relationship. While there are broad similarities between US and Colombian law in this regard, there are some key differences as well.
Understanding what help is available and where to find it can make a significant difference. For relatively small unpaid amounts, the cost and complexity of hiring a lawyer and pursuing a case in regular civil court can be prohibitive for an independent contractor. Knowing this option exists can also add weight to a demand letter sent before initiating legal action. Many contracts include ADR clauses, sometimes mandating arbitration and waiving the right to go to court.
Graphite has sample consulting agreements, W-9 Forms and Nondisclosure agreements in our Resources section for your convenience. These trends have sent many gig economy platform operators in particular scurrying to update their contracting terms and documentation. If you’re a boutique to midsize VC or PE firm, potential class actions by disgruntled contractors aren’t typically a big concern. The IRS or DOL, though, might flag discrete cases or field the occasional complaint from a regularly employed contractor who’s being left out when it comes to benefits, stock options or incentive bonuses. When these are given to a firm’s salaried staff working on the same project, feathers can ruffle. Here’s a rundown of the ten legal rules for independent contracting that you should commit to memory if you want to avoid problems.
These protections are vital because contractors, like any small business, can be targets of deceptive schemes or unfair contract terms imposed by larger entities. Knowing that the FTC provides an avenue for recourse and sets standards for fair business conduct is an important safeguard. Understanding the distinction between “work for hire” and an “assignment” of IP is crucial for both contractors and clients, particularly concerning copyright. Having clear payment terms in your contract and promptly invoicing for completed work are crucial first steps. If payment issues arise, you may need to send demand letters or, in some cases, pursue legal action.
This will ensure clarity over who is responsible for what and limit misunderstandings or disagreements. Carefully read the contract before signing it, ensuring that all your key points are clearly outlined. Since Bill owes more than $1,000 in self-employment taxes—and that’s not counting income taxes he’ll owe once he’s done filling out his 1040—he needs to make quarterly estimated tax payments to avoid IRS penalties.