Probably the main reason you became an independent contractor (aka consultant, freelance and IC) or want to, is to be your own boss. Unfortunately, some U.S. companies don't fully understand the difference between independent contractors and employees. Even among companies that do understand the difference, there are those that attempt to exploit the relationship, because it's clearly to their advantage to do so.
Companies don't have to withhold federal, state and Social Security (FICA) taxes, or pay unemployment or workers' compensation insurance for independent contractors. They also don't need to offer benefits like paid sick leave, vacation, health insurance and stock options, as they do to attract and retain employees. In fact, companies don't have to offer much of anything to independent contractors, except that for which they've agreed by contract (independent contractor agreement). That saves tons of paperwork and big bucks, giving dishonest companies lots of incentive to cheat independent contractors of their rights. The cheaters (and naive) misclassify workers as independent contractors, but still attempt to control them as employees. In doing so, they reap the benefits of both worlds, while depriving independent contractors of the very reason they became independent contractors in the first place: to be their own bosses.Many misclassified independent contractors don't fully understand the difference either, which helps to perpetuate the problem. Here's how it's supposed to work when you are correctly classified as an independent contractor:
Companies are not your employers per se, but your clients. As such, they are not entitled to direct you in your work. Of course, your clients have a right to say what they expect for the rates they're paying you, but only as it relates to the outcome of the project. It's your right to decide when, where and how to get the project done. Natch, it's wise for you to satisfy your clients at the project level, if you wish to get paid and receive favorable referrals for landing more contract jobs. But that doesn't mean you must allow a client to control you as an employee. That's against the law. In other words, by U.S. law, an employer cannot classify you as an independent contractor, then dictate when, where and how you work, as though you are an employee. It's all about degree of control and independence.
Several U.S. government agencies have good reason to be interested in whether or not workers are correctly classified, including the Department of Labor, Social Security Administration, Workers' Compensation Offices, and Internal Revenue Service (IRS). Because companies don't withhold taxes for independent contractors, independent contractors are supposed to pay their own taxes quarterly. But many don't, intentionally or naively. That makes the rest of us pay more to the government agencies "robbed" of funds.
When companies misclassify employees as independent contractors, they are not paying into FICA, disability, unemployment and other useful government programs. This ultimately cheats all workers of their rightful benefits. It's the government's job to protect workers from exploitation. Misclassification cheats independent contractors of their rights as self-employed individuals. It might also cause them undue stress, because they feel pressured to put up with it just to keep working.
Under US law, you are either an employee or an independent contractor. It's one or the other. There is no in between. The IRS has taken the lead in helping employers correctly classify their workers, by developing the "Common-Law Rules".
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