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Insights and Expertise

their work, but there may be other arrangements. Em-
ployees are not incorporated entities; they are individual
people.
Employees are entitled to whatever benefits the employer
has made available to them. Employers are obligated to
Legal ease: make certain deductions from payroll to the IRS and state
departments of revenue.
What is an independent contractor?

Independent contractors, sometimes called freelancers or
self-employed individuals, are people who work autono-
mously on defined tasks in exchange for agreed payment.
Independent ICs usually use their own tools to carry out their work. ICs
are usually paid on IRS Form 1099, and they are able to
contractor versus deduct expenses for their own business operations from
their income taxes.

employee minefield ICs report their IC revenue as business income. An IC can
operate as an individual person, a sole proprietorship or
an incorporated entity. Some states will, however, pre-
By Adam Atlas sume that an individual providing services to a business
Attorney at Law is an employee if they do not operate through an incorpo-
rated entity. Businesses that engage ICs do not generally
make deductions from payments to ICs as they would for
anger: Many sales agents and other payments employees.
professionals working with you as indepen-
dent contractors might actually be employees. Does an IC contract make someone an IC?
D This is an issue that all ISOs and other pay-
ments businesses should seriously consider. The custom- No. The form of contract is relevant to determining the
ary line drawn between independent contractor (IC) and type of working relationship, but it does not offer the final
employee can be quite different from the legal line. word on the relationship. Instead, state and federal author-
ities will look to the actual substance of the relationship.
Businesses that get this wrong can be in for a rude There are a handful of factors to look at; the following are
awakening from state departments of labor, employees the three leading indicators:
or other interested parties. The purpose of this article is
to inspire ISOs and other payments businesses to take a • Behavioral: Does the business have control over
fresh look at their sales teams to make sure they have been what the individual does in their work and how
properly classified. The classification is relevant under they do their work? In the payment services/ISO
both federal and state law. sales market, this line of inquiry would cover ques-
tions like hours of work, who sets appointments,
What is an employee? where the individual does most of their office work
An employee is a person (actual human) hired by an and who pays for supplies for the person's work.
organization to perform specific responsibilities in Another factor in the ISO world is that agents are
exchange for compensation. An employer directs the
employee in the performance of their duties, such as required to comply with ISO training and sales
manuals as well as the Visa and Mastercard rules.
how, when and where they are performed. While many
employment relationships are evidenced by a written These industry-specific rules could tip the relation-
ship into employment if they are perceived as giv-
agreement; there is no legal requirement for employment
agreements to be documented. ing the business substantial control over how the
person carries out their sales activity.
Employment income is reported on the IRS Form W-2. • Financial: To what degree does the business con-
Employees pay tax on their employment income as trol the income of the individual? Does the individ-
personal income. As a general rule, employees are not ual earn revenue from multiple sources or only the
allowed to deduct their personal expenses incurred in the business? Has the person been promised a mini-
course of performing their work as employees. mum wage of some kind?

Also as a general rule, employers provide employees with • Type of relationship: What does the contract ac-
the tools (for example, a computer) they need to carry out tually say? Are there benefits like insurance and

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