Understanding The Legal Side Of Self-Employment

The idea of being your own boss is something that greatly appeals to most people. Getting to set your own working hours and dictate your own terms while not having someone else tell you exactly what to do are definitely major benefits that come along with being self-employed.

Nonetheless, self-employment has its definite drawbacks as well, and of these, the potential legal and tax troubles you get into from not doing everything by the book are among the biggest and most obvious. While needing a labor lawyer would be the answer when legal problems arise in normal employer-employment circumstances, self-employed individuals answer only to themselves. In light of this, it’s essential that all self-employed people take their time to fully understand all of the relevant laws, since not understanding the law is never a valid excuse.

The Legal Definition of Self-Employment

The IRS will classify you as self-employed if:

• You carry on a trade or business as a sole proprietor or an independent contractor.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself (including a part-time business)

The second type of self-employment — and the one with the potentially trickier legal issues — is individuals working as either an independent contractor or consultant. In this case, your legal status as self-employed depends on you meeting a range of different criteria related to your work.

Enjoying the Benefits of Working as an Independent Contractor

The term independent contractor is quite wide-ranging in its definition, as doing any small side job for even a few hours a week could qualify (see independent contractor definition). As an independent contractor, you have many benefits over a typical employee, such as being able to deduct business expenses from your taxes and having the ability to hire additional workers to help you as needed.

The problem is that these benefits mean the IRS always seeks to reclassify a company’s independent contractors as employees whenever doing an audit, which can be bad news should it happen to you since you’ll immediately lose all of the benefits that come with being self-employed. The good news is that this isn’t a problem for independent contractors and consultants that perform work for more than one company. Still, it could definitely happen should you take on a large project that demands all of your attention for any significant period of time if you don’t take the appropriate steps to prevent it.

How to Maintain Your Status as an Independent Contractor

There are many important factors that can help to distinguish you as an independent contractor, including registering an official business name, obtaining a tax registration certificate, and registering your independent-contractor status with the IRS. Luckily, there are also many legal resources for self-employed people that can help you accomplish any or all of these tasks. Still, even all of this isn’t always enough to prevent the IRS from reclassifying you as an employee.

The most important factors related to your independent-contractor status are more closely related to your business and the work you perform. In this sense, the biggest thing separating contractors from employees is that an independent contractor assumes the risk for both profits and losses instead of simply getting a paycheck. What this means is that there’s a higher chance of being reclassified as an employee if your work doesn’t really involve any risk of loss.

The other factor is that independent contractors retain full control over their work, unlike employees who must do whatever their boss or the company tells them. This factor is also vital in maintaining your status, and it basically means that you have to retain complete control over whatever you were hired to do as long as you provide the required results. This means being able to dictate your own working hours, location (unless working onsite is required), staff, and methods for accomplishing the given task. Should you give up some or all of these rights given to you as an independent contractor, you may also lose your status as one.

Ultimately, there’s a whole lot about the law that independent contractors should know. Should you run afoul of the many different laws related to self-employment, you may soon find yourself facing huge tax penalties, fines, and various other legal troubles. In this way, it’s far better to prepare yourself for everything ahead of time instead of just hoping for the best and waiting to see what the consequences might be. Otherwise, you may quickly end up back to being just another employee answering to your boss.

Samantha Acuna is a writer based in San Francisco, CA. Her work has been featured in The Huffington Post, Entrepreneur.com, and Yahoo Small Business.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional in your state.