There is no one set definition of an independent contractor in the United States. State and federal regulations that determine whether someone is an independent contractor or an employee are different, and each state tends to have their own unique criteria. Misclassifying a worker can bring strict penalties and the Internal Revenue Service (IRS) has increased their audits on companies suspected of misusing the contractor title.
The construction industry relies on the ability to use independent contractors to provide services and meet marketplace demands. That's why construction professionals need to be diligent about correctly classifying and maintaining proper independent contractor relationships.
According to the IRS definition, an independent contractor performs services that are not controlled by the employer. The employer has the right to control or direct only the result of the work of an independent contractor, not what will be done and how it will be done.
Many state regulations specify further on this definition by adding that workers must supply the materials and tools for a job themselves, set their own hours and perform these duties for other companies to be considered independent contractors. Some states even dictate that the service being performed by the independent contractor must be outside the usual course of the employer's business.
If these classification requirements are not met, employers must classify the worker as an employee and take on all responsibility for paying unemployment contributions, workers' compensation premiums, employee benefits costs and payroll taxes.
Check the specific laws in your state to ensure you are properly classifying your workers. If you are found guilty of misclassification it could end up costing your business much more in the end.
Contact us for more information about contractor classifications and protecting your risk when working with subcontractors.