If you’re like many independent contractors, you started a business because you either had to or you felt your skills were worth more money than an employer would pay you. Unfortunately, there is a lot more to running a contracting business than just bidding for jobs and completing the work. There are numerous laws and regulations that must be adhered to if you don’t want to get in trouble with the federal government or your state and local governments. While independent contractors don’t work for an employer, there are still laws and regulations that must be followed. If not, it could cost your business a significant amount of money. The last thing you want is for your profits to be eaten up defending your business and/or in paying fines. What are some regulations that you should be focused on…
IRS
The Internal Revenue Service (IRS) over the last ten years has cracked down hard on those who think they are independent contractors but in reality, are not. To be considered a true independent contractor, you must have full control over your behavior, hours, nature of the relationship with those who hire you, and the financial controls of your business. If you work for a general contractor and you make more than $600 over the course of a year, they must provide you with a 1099-MISC form. This form shows your total earnings for the year. Your responsibility is to provide the general contractor a valid ID number such as a social security number if you work as a dba or an Employer ID Number if you have a formal business entity. As an independent contractor and business owner, you will be responsible to file and pay your own taxes every year.
Department of Labor (DOL) Regulations
If the IRS weren’t enough to deal with, there is the Department of Labor. As an independent contractor, you are not subject to the Fair Labor Standards Act (FLSA). However, much like the IRS the DOL may want to determine if you meet the criteria of an independent contractor. Sometimes a contractor doesn’t know if they are an independent contractor or an employee. Unfortunately, ignorance is no excuse. The DOL wants to know as there is no single rule or test they use to determine whether someone is an employee or an independent contractor for FLSA purposes. However, there are some factors they may use in consideration:
- The level of services provided and its relationship to the hiring business.
- The permanency of the relationship. If you’ve worked exclusively for someone for more than six months or a year – you are probably not an independent contractor.
- The degree of independence an independent contractor has – if the general contractor or hiring company is dictating your work schedule you are not independent.
- Where the work is performed.
- Does the hiring company or general contractor have a license?
- How often and in what way is the independent contractor paid – is it a regular schedule or does the independent contractor submit invoices?
State and Local Regulations
In addition to the IRS and DOL, each state has rules and regulations that determine the status of independent contractors as well – and they have been tightening and enforcing their rules more rigidly in recent years. In addition to fines and penalties by the federal government agencies, you may also find you could have substantial fines from state and local governments as well. It’s best to check with your state’s Department of Labor or similar agency and in your local county or city as well to ensure you are not in any violations.
