Last Updated August 24th, 2010

Are You Really an Independent Contractor?

When you start working at home for others, it’s important that you know if you are considered to be an independent contractor or an employee of that company. It has implications for how you pay your taxes as well as how you perform your work.

Employers don’t always get it right, either. Some will label you as an independent contractor while treating you as an employee.

What’s the Difference Between an Independent Contractor and an Employee?

The best place to figure out if you’re an independent contractor or an employee is the IRS website. They’re the ones enforcing the rules when it comes to taxes. You don’t want to get it wrong.

They generally follow these three common law rules to determine if a particular person is an independent contractor or an employee (quoted from the IRS website):

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Sometimes you’ll deal with a business that stretches these rules to call people independent contractors, when they should be considered employees. They do this to avoid paying benefits, unemployment insurance, and taxes on your income. When you’re really an independent contractor, these things are your problem.

Simply put, an employer has much more control over how an employee does his or her job than they do over an independent contractor. They also have more obligations to an employee.

What Does This Mean for Work at Home Jobs?

A work at home job can be either a job where you’re an employee or an independent contractor. A lot of them want to call employees independent contractors, but many companies have learned the hard way to be more careful about that. It’s expensive for companies to get it wrong if they are caught by the IRS misclassifying employees as independent contractors. Suddenly they’ve missed paying a lot of taxes.

When an opportunity says you’ll be an independent contractor, take a look at what they’re requiring of you. Sometimes they’ll have it right, but other times they won’t.

Getting it wrong has implications for you as well. If you’ve been taking advantage of being a business on your taxes (as you are when you work as an independent contractor), you may find out that you’ve taken some deductions that won’t work out if you’re an employee.

What Should You Do as an Independent Contractor?

Being an independent contractor is not as simple as landing a freelance position in most areas, at least not legally speaking. You can often get away without all the business registration stuff, but if you get caught most areas have pretty heavy fines you’ll be facing. Better to make your business legal.

That means naming your business and getting a Fictitious Business Name (FBN) or Doing Business As (DBA) as required in your area. Check with your county clerk website or Chamber of Commerce for details. You may also need a business license or tax registration certificate.

Having a business name is also necessary if you want to open a bank account in the name of your business. If you’re going to be receiving checks in that name, you’ll need that account. Most banks will want proof that you have registered your business name before opening an account for you in that name.

Having a business name also enhances how professional you appear to clients. You aren’t just some person taking in work. You’re a professional who has taken the time to formally start a business.

If you really are an independent contractor, then the companies or people you work for will not be taking out taxes from your income. That’s your responsibility, and you should be doing that quarterly. These are called estimated taxes, and you’re responsible for them on any income that is not subject to withholding.

You may also want to get an Employer ID Number (EIN), even if you aren’t employing anyone yourself. This gives you a number other than your Social Security Number by which to identify your business for tax purposes.

What If an Employer Calls You an Independent Contractor When You’re Really an Employee?

This is a tough one. You can talk to your employer politely and find out why they consider you to be an independent contractor rather than the employee you think they’re treating you like. It’s something to be done with caution, as it may impact your employment with them.

If they’re calling you an independent contractor, you can also insist on being treated like one. Set your own hours. Take on other clients. Remember the good parts about being an independent contractor.

You can just ignore the situation if you like, while keeping in mind the potential tax issues on your side. Fortunately, if you’re acting as an independent contractor and paying your estimated taxes, you’re not likely to be underpaid when it comes time to file. But it can be worth the work experience to just cope with a misclassification.

You can get a lawyer, but think carefully first. This will very likely impact your employment, and you might not want to do that.

Disclosure: Some of the links in this post may be 'affiliate links.' This means if you click on the link and purchase the item, I will receive an affiliate commission.

Last Updated April 14th, 2010

It Costs Money! Is It Legitimate?

I’ve always felt for the people who are trying to get started working from home. It’s tough. You hear about and find more scams than you do legitimate opportunities. And when you find something you think might be good, there’s a price tag attached.

Is it a scam or isn’t it?

The trouble is that costing money isn’t as clear cut a pointer to a scam as you might like. If they say it’s a work at home job, that you’ll be employed by them and so forth, then yes, most likely it is. But if it’s a home business, there are no guarantees.

Not All Work at Home Expenses Mean It’s a Scam

This is the hard part. Many work at home jobs are in fact independent contractor opportunities. That means that you aren’t an employee. You’re running a business. They have certain things they need you to buy or pay for.

Some legitimate employers expect you to pay for your own background check, for example. I’ve never been too happy about this one, as the search for employees should be a cost of doing business.

There are companies such as Arise, which expect you to pay for your own training as well. These are positions in areas such as customer service and tech support. You have to certify for each client you work for through them. That’s their business model, yet other companies in the same industry don’t require this. They’re upfront about it, however, and once you’ve met all the requirements you’re able to start working and they do pay. Not a scam, just a bit pricier than you might have planned.

Most legitimate work at home jobs will expect you to have certain things already, such as a computer, high speed internet access, possibly a dedicated second phone line, a headset and appropriate software. These are all things you will probably be buying if needed on your own, not through any potential employer.

So When is It a Scam?

Some things in a work at home “job” opportunity flag it easily as a scam. Being expected to pay to prove that you’re seriously interested, for example. Jobs do not have application fees. As I said above, sometimes you will have to pay for a background check, other times your potential employer will do so, but that’s something different.

If you have to buy software from your potential “employer” it’s likely a scam. Generally speaking you’ll either be using software you can buy elsewhere or the employer will provide you with their proprietary software at no expense.

If they’re sending you a check to go buy supplies I would also consider that a big red flag. I had this one come up on my forum recently. If an employer needs you to have particular equipment, it makes plenty of sense for them to send you the equipment, not a check for you to go buy it yourself. There are too many scams involving check cashing out there.

What If You Can’t Tell If It’s a Job or a Home Business?

So many home business opportunities like to talk up the opportunity as though it’s a job. Sometimes jobs really are business opportunities. If you’re going to be an independent contractor, strictly speaking you’re running your own business. That said, pay attention to IRS rules about whether or not you’re really an independent contractor or an employee.  Many businesses are having to be more careful about who they call independent contractors and who they call employees, as this impacts how taxes are paid and by which party.

But other opportunities call themselves work at home jobs yet have nothing to do with being employed by that company. I’ve seen people advertise network marketing opportunities, affiliate marketing opportunities and more as work at home jobs, when it’s perfectly clear that they’re really home business opportunities.

My own rule of thumb is that if they can’t be upfront about the work being a home business opportunity, I’ll find someone else to learn from.

This is extremely common in supposed data entry work at home jobs. They’ll tell you that you’re filling in forms. The forms are for paying per click for advertising in search engine results, and you’re the one paying for every click, then getting a commission on sales or leads.

That’s a business, not a job. If the person who says they can teach me to do that can’t be upfront about that part, I don’t need to learn from him or her. I’ll find someone who can be upfront about the risks as well as the potential benefits. There are great resources for that out there, such as the AdWords Guide.

For those who are interested, pay per click advertising can be quite lucrative if you master it, but often expensive to learn. Not every campaign will pay off, even for those who are good at it.

It’s Hard to Tell the Difference Sometimes

Even the most alert job seeker will sometimes have trouble telling if an opportunity is a work at home job, home business or a scam. Some of the people who advertise these things are very good at obscuring the truth.

When in doubt, ask around.

Ask on work at home forums. Ask anyone in your life who understands that there are some legitimate work at home jobs out there. Just get a second opinion before you take too big of a risk.

You can even contact the person advertising the opportunity and ask for more details. See what they have to say. If they’re being too vague you may not want to trust them. If it becomes clear that it’s really not what you’re after, there’s your decision. If it’s sounding better, you might be starting the application process or you might be asking on some forums or elsewhere what people think of the additional details.

In many cases, searching for “opportunity name scam” isn’t going to get you the results you were after. Too many marketers have figured that one out, and positive reviews abound for many questionable products under titles such as “Is Opportunity Name a Scam?”

It’s not easy to find legitimate work at home jobs out there. There are way too many scams, and too many businesses trying to get your attention by pretending that they’re jobs. But there are great opportunities out there for those who find them.

Disclosure: Some of the links in this post may be 'affiliate links.' This means if you click on the link and purchase the item, I will receive an affiliate commission.

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