Freelancers are an increasingly popular staffing solution, but do you understand the full
implications of using freelancers in your business? While the tax advantages of freelancers and
independent contractors are well-known, businesses encounter problems when they approach
freelancers as a cost-saving tactic without weighing the risks. Here’s what employers should
know about their responsibilities when hiring independent contractors, brought to you by
Jobsmarket.com and SocialHealthToday.com.
What defines an independ contractor?
Independent contractors, also known as freelancers, are self-employed individuals who provide
goods or services on a contract basis. Unlike employees, independent contractors aren’t
financially dependent on one employer. Instead, they operate independent businesses with
autonomy over their own profit and loss. Independent contractors provide their own tools,
equipment, and workspace and complete work at their own discretion.
Why do companies hire independent contractors?
The independent nature of freelancers makes them a flexible staffing solution for short-term,
one-off, and niche assignments. However, that’s not the only reason to hire independent
Tax benefits of independent contractors
Many companies are drawn to independent contractors for the cost savings and tax benefits.
When paying independent contractors, businesses are not required to:
● Collect IRS Forms W-2 and 1040.
● Withhold income, Social Security and Medicare (FICA), or unemployment taxes.
● Pay FICA or unemployment taxes.
● Maintain workers’ compensation insurance.
● Provide sick leave, paid time off, health insurance, or other employee benefits.
It’s clear why independent contractors are an attractive addition to a company’s financial
strategy, especially as companies anticipate corporate tax rate hikes. In addition to leaning on
the contingent workforce and expensing more depreciable assets, smaller organizations are
increasingly restructuring as LLCs to take advantage of the 20% Qualified Business Income
deduction and avoid double taxation. LLCs reserve the option to be taxed as an S Corporation
or C Corporation, but the forms to start an LLC are less complicated, and annual fees are
significantly lower in most states. However, remember that you’ll need to assign someone as
your registered agent on LLC documentation.
What are the risks of misclassifying freelancers?
Despite these advantages, employers must be cautious when hiring independent contractors.
Companies that misclassify regular employees as independent contractors for the cost savings
risk owing penalties, back taxes, and interest if caught. Misclassification penalties include:
● $50 per Form W-2 not filed.
● FICA back taxes plus interest.
● Penalties for unpaid taxes.
● Additional fines and penalties for intentional misconduct or fraud.
It’s imperative that employers apply updated rules when classifying workers as employees or
independent contractors. The final rule under the Fair Labor Standards Act reaffirms the
economic reality test and identifies several factors to determine whether a worker is an
Does the ADA apply to freelancers?
Title I of the ADA prohibits discrimination on the basis of disability and requires reasonable
accommodations for applicants and employees with disabilities.
Title I of the ADA does not cover independent contractors. Nonetheless, a
nondiscriminatory and accessible workplace is a smart business strategy for employers.
Workers with disabilities choose self-employment at twice the rate of non-disabled workers.
Accessible workspaces and technology and inclusive hiring practices are necessary if
organizations are to tap this sizable talent pool. Furthermore, businesses operating in the gig
economy may be subject to equal opportunity provisions even if no employer-employee
relationship exists. An accessible website, inclusive job descriptions, and a standardized
interview process avoid bias and discrimination on the basis of disability.
Hiring freelancers comes with fewer responsibilities and expenses for businesses, but
classifying workers as independent contractors isn’t a free pass for employers. Independent
contractor classification is subject to strict standards with steep penalties for businesses that run
afoul of the law. Take care when hiring independent contractors and, when in doubt, consult
trusted professionals for expert advice on the ADA, universal accessibility design, and