Independent Contractor or Employee – How USA Defines Each | IT Contractor

UK Independent Contractor
UK Independent Contractor

Independent Contractor or Employee

Are you an Independent Contractor or Employee according to the IRS definition? The IRS defines an independent contractor as a ‘business owner or contractor who provides services to other businesses.’

So who would determine if a person is an Independent Contractor or Employee? The hiring business owner ‘must determine whether the individuals providing services are employees or independent contractors.’

So how does the business owner determine the business status of contractors?

There are 3 main ways to do this?

Behavioural – Who Controls The Work to Be Done?

The IRS asks ‘Does the company control or have the right to control what the worker does and how the worker does his or her job?’

This is similar to the UK where Direction, Supervision and Control is one of the three major IR35 Factors.

Financial – Who Controls the Business Aspects

The IRS asks ‘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.) ‘

This would be a pretty good one for UK Independent Contractors. They are paid by time sheet and invoice. Employees are not paid this way. Also, contractors are not generally reimbursed expenses by the company.

A wary contractor should make sure that he or she uses as little of the hiring company’s equipment as they can, e.g. stationery and note books.

They should use their own PC if they can. Of course, most times, they would use the company’s network. But overall, this would be good for UK independent contractors.

Type of Relationship – Contracts and Benefits

The IRS ask ‘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?’

This would be very good for UK independent contractors.

They have written contracts with hiring companies which are very different from the contracts of employment that permanent employees have.

UK independent contractors don’t get any benefits like pensions, insurance, holiday pay or sick pay from the hiring companies.

Independent Contractor or Employee Relationship

I’m not quite sure what they mean with the question about ‘will the relationship continue’. It appears to hint that this would be good which is the opposite of the UK, where HMRC appear to believe that if you are a long time doing business with a company you are probably an employee. It used to be said that there was a 2 year limit. However, that has been since debunked by the courts.

Is the Work Done a Key Aspect of the Business?

I’m not sure about the second half of that question either, i.e. is the work performed a key aspect of the business? I don’t know whether they mean the hirer’s business or the contractor’s business. I would guess that it is the contractor’s business. So, they could answer yes to that.

One thing I’ve noticed is that the Independent Contractor or Employee definition and the difference between them, is much more lenient in other countries. The UK appears to have the harshest regime of the lot with IR35 and the looming changes to it in April 2020.

Contractor Client Relationship Via IR35

Since IR35 appeared in 1999 under Tony Blair’s Labour Government, successive governments have just got harsher and harsher with contractors. They use IR35 to beat them into submission.

What was it the late Theresa May said?

“It is an unfair anomaly that a self employed person earning £100,000 a year pays less tax than a permanent employee earning £100,000 a year.”

Contractors will say good riddance to her. However, there is unlikely to be a contractor friendly replacement to her elected. The big consultancies, who see contractors as rivals, will see to that.

Here is the full IRS document about Independent Contractors or Employees.

Here’s a list of the main UK IR35 Factors to compare with the USA’s.

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