What Independent Contractors Need to Know
Working as an independent contractor, rather than a salaried employee, has many benefits, among them the freedom and flexibility to work where and when you want. Electricians, computer repair technicians, and plumbers are just a few of the many types of self-employed workers.
Some Concerns for Independent Contractors
First, always make sure when performing work or services for another that you are properly classified as an independent contractor rather than an employee. Independent contractors include freelancers and all self-employed workers. The freedom of being your own boss brings with it concerns and responsibilities that salaried employees don't need to worry about, such as:
- Workers' compensation insurance
- Self-employment taxes
- Lack of protections under labor laws and unions
State Workers' Compensation
Workers' compensation covers medical bills, temporary or total disability benefits, and other personal needs while you are unable to work due to an injury suffered in the workplace. Most states typically do not require employers to cover independent contractors through workers' compensation insurance. For that reason, an employer will often require that an independent contractor carry workers' comp at his own expense. Without insurance coverage, a self-employed worker on a job where injuries could occur could expose the employer to liability. Workers' compensation laws are complicated and vary from state to state, so it is important for independent contractors to know the regulations where they work.
Federal Workers' Compensation Law
The Federal Employee Compensation Act (FECA) is similar to state workers' compensation laws. In some cases, however, independent contractors hired to perform temporary work for the U.S. government may be covered under this program for injuries or diseases resulting from their work.
Taxes are traditionally withheld from the pay of most wage earners by their employers. But self-employed individuals are responsible for paying the total amount due for Social Security and Medicare taxes, which together the IRS refers to as self-employment taxes. Self-employment taxes do not include income taxes, which independent contractors must pay, usually on a quarterly basis. No income taxes are withheld from the self-employed worker's pay.
Exemption from Labor Law Protections
Most workers are covered under a complex system of state and federal labor laws that include limits on overtime, unlawful termination, and minimum wage restrictions. But, as self-employed workers, independent contractors are exempt from the protection of these laws.