There are advantages and disadvantages to using independent contractors on your workforce. Most notably, employers are not required to pay certain benefits and taxes on behalf of their independent contractors. On the other hand, the penalties for misclassification can be costly and classification is not necessarily a simple inquiry. Indeed, as explained below, there is no universal test for what constitutes an independent contractor, and even the most widely-adopted test can lead employers to draw inconsistent conclusions.
A company's financial obligations to a work vary significantly depending on whether the individual is an employee or an independent contractor. For example, employers must withhold federal income taxes, as well as state and local taxes for their employees but not for independent contractors. Likewise, companies must also withhold taxes under the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax (FUTA) in accordance with the Internal Revenue Code (IRC) for their employees. Additionally, employees participate in employee benefit plans, while independent contractors do not. As benefit plans often account for a large percentage of payrolls, this is a potential area of savings for employers who choose to use independent contractors. Finally, a host of other laws , including the National Labor Relations Act (NLRA), the Fair...
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