Classifying a worker as an independent contractor removes them from the requirement of withholding federal and state income tax as well as, in most cases, eliminating their eligibility for benefits such as time off with pay, health care and participation in retirement plans. These savings can often add up to close to 40% which is significant to an employer’s budget. The burden for paying the taxes shifts to the independent contractor who is self-employed.
It sounds like a perfect solution for cash strapped companies but of course there are issues. The IRS does not provide a clear definition of what an Independent Contractor is. This is a quote from their website, “The general rule is that an individual is an independent contractor if the payer (the company) has the right to control or direct only the result of the work and not what will be done and how it will be done.” Another factor that is considered when determining whether a worker is an independent contractor is the length of the relationship. How often the worker works for the company, under what circumstances as well as other factors all play a part in identifying the type of employment status; employee or independent contractor.