An independent contractor is a person, business, or corporation that provides goods
or services to another entity under terms specified in a contract or within a verbal
agreement. Unlike an employee, an independent contractor does not work regularly for
an employer but works as and when required. Independent contractors are usually paid
on a freelance basis.
In the United States, any company or organization engaged in a trade or business that
pays more than $600 to an independent contractor in one year is required to report
this to the Internal Revenue Service (IRS) as well as to the contractor, using IRS Form 1099-MISC. This form is merely a report of the money paid; independent contractors do not have
income taxes withheld from their pay as regular employees do. Independent contractors
are responsible for their own self-employment tax.
The IRS conducts audits of businesses to insure compliance with federal taxing statutes.
If the IRS determines that an employer incorrectly treated a worker as an independent
contractor rather than an employee, it can assess the employer for all unpaid taxes
with respect to that worker, and other workers performing similar services.
The IRS may make the assessment retroactively, subject to the IRS' time limitation
for assessment and refund of taxes, which is similar to SSA's time limitation for
correcting earnings records. Therefore, an IRS assessment involving many workers can
include significant amounts of money.
Some employers object to these assessments. They argue that the common-law control
test used to determine employment relationships is too subjective to permit them to
determine a worker's employment status with any certainty. Consequently, employers
may, based on their own interpretation of the common-law rules, feel justified in
treating workers as independent contractors (non-employees).
Section 530 of the Revenue Act of 1978 (Pub. L. 95-600) provides businesses with some relief from these assessments. The Small Business Job
Protection Act of 1996 (Pub. L. 96-541) amended Section 530 to extend its effective date until July 1, 1982, and Pub. L. 97-248 extended its effective date indefinitely. However, the Tax Reform Act of 1986 (P.L. 99-514) provides that Section 530 does not apply in certain cases.
Section 530 provides businesses, not workers, with relief from federal employment
tax obligations if businesses meet certain requirements. It also clarifies that the
first step in any case involving worker classification is to determine if the business
meets the requirements of Section 530. If the business meets the Section 530 requirements,
the business is not liable for employment tax for the workers at issue.