An independent contractor is a freelance worker who contracts to provide professional services (such as doctors, lawyers, investment advisers) and non-professional services (like photographers, website designers, dog walkers) to a client or business for payment.
They are not considered employees because they work independently and use their own resources and equipment to do the job.
Classifying a worker as an employee or independent contractor is an essential distinction under state and federal law. The determination has tax and benefit implications for the worker and the business that hires them.
What is the Independent Contractor Law Texas?
Independent contractor rules and regulations Texas vary from state to state. Some states follow the regulations put forth by the federal government agencies that oversee whether a worker has an independent contractor status or an employee status.
The IRS and Department of Labor are the agencies that regulate how independent contractors are classified. The IRS looks at who controls the business relationship, the hiring business paying for the service, or the contractor providing the service. They also look to see if there is a contract or benefits involved that are the type provided in an employer-employee relationship.
The DOL uses a different classification standard than the IRS that asks:
- How much control the worker has over the nature and manner of the work;
- What level of skill is needed for the job; and
- How long-lasting is the relationship between the worker and employer.
Rules for Being an Independent Contractor in Texas
Some Texas independent contractor law uses a standard similar to the IRS's in determining if a worker is an employee. Others use something called an ABC test. This test designates a worker as an employee unless the following three criteria are met:
- The client does not control or direct the worker (Absence of control);
- The worker doesn’t do the work that the company performs in its usual course of business or on their premises (not typical Business); and
- The worker works independently in a trade, profession, or industry (Customarily works independently).
The best way for a worker to make clear that they are an independent contractor is to make sure there is a signed independent contractor agreement before they begin any project. This contract will ensure the independent contractor’s rights are protected, and they will have legal recourse in court if the contract is breached.
Why Does My Employment Classification Matter?
Your employment classification matters because it affects the rights and obligations existing between you and the business hiring you. Companies prefer to classify workers as independent contractors because if they are not considered employees, then the business doesn’t have to:
- Provide standard employee benefits like health insurance, vacation pay, maternity and paternity leave, and retirement contributions;
- Follow state minimum wage law;
- Offer overtime pay, worker’s compensation, or adhere to state and federal labor and hour laws; and
- Pay the worker’s social security or medicare taxes.
Businesses often find their independent contractors through service referral agencies.
What To Do If You’ve Been Misclassified Under Texas Contractor and Regulations Law
Your independent contract agreement may say that you are an independent contractor, but the Internal Revenue Service (IRS), the DOL, and the laws governing contractor and regulationsTexas may say otherwise. If they find that you are an employee, you have the right to challenge this designation.
If a company incorrectly classifies workers as independent contractors instead of employees, they can be forced to pay fines and penalties and perhaps have to repay employment taxes.
What is Form 1099 Income or W-2?
The Form 1099 and the W-2 form are the federal tax forms that an independent contractor needs to use.
The company or person that hires the independent contractor must file form 1099 with the IRS and send a copy to the independent contractor. The independent contractor must report the income on 1099 on their tax return.
A W-9 is a form to give an independent contractor’s official information to the person hiring them. It provides the contractors:
- Legal name and address;
- Taxpayer identification number (TIN); and
- Social Security Number.
The person hiring the independent contractor will typically ask for their W-9 before the project begins. The independent contractor should also be prepared to give each person who engages them a completed form.
What is AB 5 in Texas
The California Assembly Bill AB 5 was signed into law in 2019. The bill responded to the challenge of classifying ride-share company drivers under state law.
The bill made the ABC test of how to characterize independent contractors' official state employment law that would be regulated by the state Department of Industrial Relations.
The ride-sharing companies didn’t comply with the law because it would have made the drivers employees and not independent contractors. This classification would cost the companies more money.
A California superior court ultimately ruled that the driver couldn’t be classified as an independent contractor.
The ABC Test for Independent Contractors in Texas
Under this test, a worker is an employee unless it is shown that:
- There is an absence of control over the worker on the part of the hiring business–for instance, the worker sets their own hours;
- The worker does a job that is not a part of your everyday business—like when an electrician puts the wiring in your restaurant; and
- The worker is customarily engaged as an independent contractor for the same work they do for a particular company.
Thirty-three states use this test.
A Breakdown of Texas Contractor Law
Sometimes, when a worker isn’t considered an employee under federal law, they still could be regarded as one under state law.
Eighteen states use a standard similar to what the IRS uses in determining if a worker is an employee. Others, as mentioned above, use the ABC test, which is considered more restrictive than the IRS test.
Additional Rules & Regulations in Texas
Federal and state laws may conflict when it comes to determining whether a worker’s employment status is that of an independent contractor or an employee. In that case, the law that applies the stricter standard for designating independent contractors applies. The goal is to ensure that workers’ rights are protected.
The advancement in technology that allows people to work from home easily and has given birth to ride-sharing and other types of new services means a significant portion of the U.S. workforce are independent contractors. The changing nature of the workforce means that the federal and state laws and regulations will also be changing.