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Independent Contract Workers VS Employees- What you need to know

What do YOU need to know about hiring an independent contractor?

Many companies rely on “gig workers” — a.k.a. independent contractors — to produce the bulk of their work. There are significant savings involved in utilizing independent contractors. Here are some of the savings that companies are tapping into:

  1. Office space

  2. Any equipment needed to perform the task at hand

  3. Worker’s compensation insurance

  4. Unemployment insurance as dictated by our region

  5. Social Security and Medicare (for U.S.-based businesses)

  6. Other benefits, such as health insurance and paid time off.

While this lower cost structure is appealing, companies need to be aware of the state and federal rules governing the definition of employees vs independent contractors.

At the federal level, in determining whether an individual is an employee or an independent contractor, the IRS follows a set of facts that provide evidence of the degree of control and independence. These facts fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

In Washington State, service performed by an individual for compensation is employment unless it is shown that:

  1. The individual is free from direction and control over the performance of the service; and

  2. The service is either performed:

  3. Outside of the usual course of business for which the service is performed, or

  4. Outside of all the places of business of the enterprise for which the service is performed

  5. The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in service contract.

  6. On the effective date of the contract or within a reasonable period after the effective date of the contract, the individual has an:

  7. Active account with the Department of Revenue,

  8. Active account with any other state agencies, and

  9. A Unified Business Identifier (UBI) number and

  10. On the effective date of contract of service, the individual is maintaining a separate set of books or records that reflect all items of income and expenses of the business that the individual is conducting.

Our team at Seattle Controller is very diligent in informing our clients of these requirements and requesting that for every independent contractor our client companies follow the guidelines laid out by federal and state agencies. Here is the list of documents required for each independent contractor:

  • A signed independent contractor agreement is in place. This agreement defines the relationship between the company and the individual providing the services.

  • A W9 form is on file and a 1099 forms is issued to the contractor at the end of the year.

  • A current WA State business license on file.

  • Payments are made upon submittal of a service invoice by the contractor.

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