If you want to change your employer to an independent contractor, then you should know that it is possible, but it comes with its set of challenges and considerations that should be thoroughly examined. If done incorrectly or misclassified by mistake, there can be legal repercussions, including sham contracting.
In this blog, we will discuss those considerations, and the process of changing any employee status, from employee to an independent contractor.
Understanding the Difference:
It’s important to comprehend the key distinctions between working as an employee and an independent contractor before beginning the procedure. When you work for an organization, you are considered an employee and are usually granted job security, benefits, and regular pay. Being an independent contractor means that you work for yourself and are in charge of your own finances, benefits, and taxes. Although you have more control over your business and clients, your revenue can change at any time.
Legal Considerations:
A person must fulfill certain requirements set forth by the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL) in order to be considered an independent contractor. The employer can be responsible for unpaid taxes and penalties if an employee is mistakenly designated as an independent contractor.
The DOL considers the following factors when determining whether someone is an independent contractor:
- Control and supervision exercised by the employer over the employee.
- Profit and loss opportunities for workers.
- Investment by workers in the company.
- The worker’s independence from the employer.
- The worker’s relationship with other workers.
The IRS has its own requirements for determining who qualifies as an independent contractor. These requirements are comparable to those given forth by the DOL, but they also take into account things like the worker’s choice of payment method, their authority to recruit and fire assistants, and their freedom to choose their own work schedule.
How to change from employee to independent contractor?
If a company wants to change an employee to a contractor, the following process must be followed:
Step 1: Determine whether the employee is eligible to be converted to a contractor
The company must first determine whether the employee is eligible to be converted to a contractor. The employee must meet the legal criteria for independent contractor status, as defined by the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS).
Step 2: Negotiate a contract with the employee
If the employee is eligible to be converted to a contractor, the company must then negotiate a contract with the employee. The contract should outline the terms of the relationship, including the employee’s rate of pay, the scope of work, and the payment terms. The contract should outline the terms of the relationship, including the following:
- The employee’s rate of pay
- The scope of work
- The payment terms
- The duration of the contract
- The termination terms
It is important to have a well-drafted contract in place to protect both the company and the employee.
Step 3: Terminate the employee’s employment
The employee’s employment must be terminated before they can be hired as a contractor. Taking this step will help to prevent the possibility of misclassification.
Step 4: Hire the employee as a contractor
As soon as an employee’s employment has ended, the company can hire that employee as a contractor. In most cases, this is done by having the employee sign an independent contractor agreement.
Bottom line:
It is important to note that the process of changing an employee to a contractor can be complex and there are a number of legal and tax implications to consider. It is advisable to consult with an attorney and/or accountant or industry expert to ensure that the process is handled correctly.
