LEARN THE “ABC TEST” FOR CLASSIFYING INDEPENDENT CONTRACTORS
Do You Run A Business?
If you run a business you will enter into contracts. You will deal with other businesses. You will likely deal with independent contractors. The IRS identifies people such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are legally independent contractors. However, the classification of a contractor vs. employee is based on fact specific circumstances. The general rule is that an individual is an independent contractor if the payer has the right to control or direct the work of the other party.
If you are an independent contractor, then you are self-employed and the hiring party is not responsible for withholding taxes. The independent contractor is responsible for their own self-employment tax.
If you perform services that can be controlled by an employer then you are not an independent contractor and will be considered an employee for which the employer is responsible to withhold tax obligations. Your earnings as an employee may be subject to FICA (social security tax and Medicare) and income tax withholding.
Do You Hire Contractors?
Do not misclassify your employees as independent contractors. You could face substantial legal penalties! Understand the “ABC Test” to correctly classify Independent Contractors!
(A) An Independent Contractor is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and (B) An Independent Contractor performs work that is outside the usual course of the hiring entity’s business; and (C) An Independent Contractor is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. And lastly, the contractor must actually be in business for themselves.
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Justin Sterling, Esq. is a leading civil litigator and business lawyer. Mr. Sterling is the founder of The Sterling Firm, a top-rated law firm with its original headquarters in Los Angeles, California. The Sterling Firm has a client base that stretches not only across the nation but also around the globe. We offer experienced and driven legal counsel for your matter. The Sterling Firm handles business law, both transactional and litigation.