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California Independent Contractor: Definition & Rules

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

Let's take a look at how California defines who is an independent contractor in the workplace and how this status differs as far as tax and work rules for both the contractor and employer.

Independent Contractors

Bill has just been hired to write articles as a guest contributor to a California-based blog. He was interested to see that as part of his on-boarding paperwork that he would be considered an independent contractor instead of an employee of the company. How is this relationship any different for Bill and his employer? In this lesson we will discuss the differences between employees and independent contractors with particular emphasis on the definitions and tax considerations.

Definition

During his time in other jobs as an employee, much of Bill's day and tasks were heavily directed by his company. His bosses told him what to wear, what his work hours would be, and how to do a job in excruciating detail. Each pay period his employer withheld money for taxes and benefits, such as health insurance. As an independent contractor, though, this dynamic changes.

California has its own requirements to qualify as an independent contractor; the primary test is the question of if a worker has the right to control how he or she completes the work. If the answer is no, the worker is an employee. If yes, he or she may be an employee or an independent contractor.

The state gives additional factors that be collectively weighed to consider a worker's status. In general, the more control an employer has, the more likely the worker is an employee. Bill is a contractor because among other reasons he has no direct supervision, is paid on the basis of project completion rather than an hourly basis, can work for multiple companies in his role, and he provides his own office, tools, and equipment.

Employees do not typically operate in this manner; they are told when to be at work and are provided with equipment and specific instructions for how to do their work. The dynamic of who controls the work is critical; a person cannot be an independent contractor just because the employer says so. Certain rules must be adhered to if the worker is to be properly classified as an independent contractor.

Rules

Why do businesses want to hire independent contractors? The most significant factor is the tax burden. Hiring employees requires employers to withhold income, Social Security, and Medicare taxes and send those amounts to state and federal governments. Employers have to pay for worker's compensation and usually offer subsidized benefit programs, such as health and life insurance to workers.

Independent contractors on the other hand can be hired for specific projects or lengths of time and simply paid with a minimum of administrative overhead. Instead of receiving an IRS Form W-2 to document income and withholding for tax purposes like employees, Bill gets a Form 1099-MISC at the end of the year, which does not have fields for withholding information such as Social Security and Medicare taxes.

As an independent contractor, Bill's employer is exempt from a number of rules that apply to employees and has different administrative requirements because he is technically self-employed. Bill does not have a right to to overtime pay, but is instead paid at his contract rate.

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