The workforce is changing and for many, self-employment is becoming the new normal. While self-employment opportunities continue to expand, new regulations are rolling out to further define what constitutes a self-employed person versus and employee in a business-to-business working relationship. This includes freelancers, consultants, IT professionals and other types of independent contractors engaged in business-to-business commerce.
If you and your business clients are depending upon a mutually productive working relationship, you’ll want to be aware of what these new regulations are. If not, both parties can be subject to fines, back payroll taxes and other fees. This is an outcome neither party wants.
To avoid these problems, here are three ways to protect your self-employment status
Worker’s Compensation
Workers’ compensation is a type of insurance that protects employees who may be injured in the course of their work. For an employee, the business would be required to provide this protection. If you’re self-employed, however, you want to have your own coverage. This is one important way to show that you are an independent entity from the business you are working for, as well as a way to ensure that you have income and/or medical benefits should you become injured while working for them at their facility.
Forming an LLC
LLC stands for Limited Liability Company. It is a type of business structure that integrates the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. In short, you keep your personal assets separate from your business assets. From a regulatory perspective, it also provides further clarity that you are an independent business entity and not an employee of your business client. There are other types of business entities as well, such as S-Corp and C-Corp. Each offers different tax and personal liability variations.
Signing a Contract
A major difference between an employee and a self-employed worker is that an employee can be told what to do, when and how at the discretion of the employer. However, a self-employed individual works under specific terms and conditions and typically for a fixed period of time. This is why it is important to have a business contract that specifies the nature of your working relationship. This includes a full description of the type of work you will be doing, how long you’ll be doing it, and when and how you’ll be paid. This document should be signed by both parties. A signed contract further validates the nature of your working relationship and that it is business-to-business and not employee to employer.
For more information on ensuring your status as a self-employed individual versus an employee, check out the US Department of Labor website on Misclassification of Employees as Independent Contractors. While regulations will continue to change and evolve over time, the above recommendations will help to demonstrate that you and your clients operate independently from each other. This protects you and protects them while also allowing you plenty of leeway to set the terms and conditions of your working relationship.