FAQ

The IRS recognizes two classifications of worker: employees and self-employed individuals. Independent contractors (ICs) fall into the second category. ICs offer services to customers on a freelance or contract basis. They typically operate as a sole proprietorship (or, in lay language, “a one person-owned business”) but can also operate an LLC (limited liability company) or corporation. ICs pay taxes on the income they earn from their customers, including federal income tax, state income tax, and a special self employment (SE) tax, which is their contribution to Social Security and Medicare. Independent contractors are responsible for their own benefits and insurance policies, including business and health insurance.

Employment has advantages. but many independent contractors have good reasons for remaining independent. These include:

Flexibility: As an independent contractor, you have the right to accept the assignments you want and turn down those you don’t want. An employee may not have that option. You have the right to negotiate deadlines and fees.

Copyright: As an independent contractor, you legally own the copyright to your work. You can negotiate to sell or assign that copyright to your clients as part of your contract. But as an employee, the employer owns the copyright, unless you are able to negotiate differently.

Deductions: As an employee, you cannot deduct your business expenses. As an independent contractor, you can deduct expenses related to your home office, including telephone, equipment, and even transcription services.

Retirement account: As a freelance writer, you likely have multiple clients. Imagine instead, you are a W2 employee of multiple clients. Likely you are not able to get into their retirement plan, if working part time. Instead of contributing up to $19,500 plus 20-25% company profit sharing to a solo 401k, or up to $57,000 in SEP IRA savings in 2020, you would only be able to contribute the IRA limit of $6,000 to $7,000. (This is not tax or financial advice—please consult with a professional about your specific situation).

Benefits: Getting healthcare, paid time off and other insurance is great, but if you work as a part-time employee for several clients, what kind of benefits would you actually get? If you lose your job, can you actually collect for unemployment income if you have other part-time jobs? If you get carpal tunnel syndrome and want to file for worker’s comp, how will the multiple insurance companies decide whose policy is responsible?

There are only a few of the reasons a person choose to be an independent contractor rather than an employee.

The ABC test is a holdover from the 1930s, before the internet, before the gig economy. It is a test used to differentiate an employee from an independent contractor. There are different versions of the test. Typically, the individual must answer “yes” to all three prongs to be an independent contractor.

(A) the individual is free from control and direction in connection with the performance of the service, both under the contract for the performance of service and in fact, AND

Explanation: Prong A is about “control,” as determined by the Department of Labor. Following deadlines and assignment specifications is not necessarily a control issue, but if you’re using the client’s equipment and the client is demanding you do the work at certain times and in certain steps, that could be a problem in saying “yes” to this prong.

(B) the service is performed outside the usual course of the business of the employer; AND

Explanation: This is the prong most problematic for writers. If your role is outside of the client’s course of business, you can say “yes” to this prong. For example, if you write web copy for a law firm, you probably pass this prong. If you write an article for a publisher to put in their magazine, you probably fail this prong.

(C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed

Explanation: Prong C refers to whether your business has more than one client for whom you do this work. If you are writing for multiple publications, you should be able to say “yes” to the C prong. If you would lose all income if the client cancelled your contract, because you are reliant on one client for your income (a situation known as permalancing), you could be in violation of the C prong. Another interpretation is whether you are doing work different from your usual profession. So, if you’re a writer and you go on the speaker circuit to talk about something unrelated, the speaking gigs could be considered a violation of the C prong.

This exemption was unique to California. It is not part of the ABC rule in most other states and is not included in the federal PRO Act.

The PRO Act would be the first federal law to use the ABC test for employment classification. The US Chamber of Commerce says this about the PRO Act: “The PRO Act would impose on the full country California’s stringent definition of ‘independent contractor’ — denying individuals the ability to work independently, threatening the emerging ‘gig’ economy, and taking away the flexibility that has allowed American businesses of all sizes to grow.”

That’s not clear. While the ABC test in the PRO Act aims to classify workers as employees for the ability to organize, “it’s another step closer for the ABC test to become a part in the country’s workplace law dynamics” according to one legal analysis. At a minimum, the law will create confusion, and some companies may prefer to use the stricter definition of an employee for all areas of their workforce.

Proposals include not mandating all prongs of the ABC test, changing the wording of the ABC test, or using the IRS Common Law Test. Other countries have an additional category, someone that is not fully an independent contractor and not fully a W2 employee.