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Common questions and answers about independent contractors.
What is direction and control?
In a contract of service for pay, direction and control means regulating or directing another's activities, or having the right or power to direct another's activities. Control happens when you set conditions about how the worker conducts himself or does the work. This is called “narrowly set” conditions. Some examples of “narrowly set conditions are:
- Telling the worker how to dress or act on the job.
- Saying the worker can only work on the job when you are there.
- Approving workers hired by the independent contractor.
- Saying that you must train the worker.
Sometimes work needs to be done when a business is closed or during off-hours. You have control when you can tell the worker when, where, and how to do the job, even when there might be other ways to do the work. When you have the right to tell the worker how to do the job, the worker is an employee.
What is an independently established business?
By Oregon law ORS 670.600, an independently established business must meet three out of the five standards below:
- Maintain a business location that is:
- Separate from the business or work location; or
- In a part of the home that is used mainly for business.
- Bear the risk of loss. For example, they:
- Enter into fixed price contracts;
- Must correct poor work;
- Warrant the services provided; or
- Negotiate indemnification agreements or buy liability insurance, performance bonds, or errors-and-omissions insurance.
- Provide services on contract for two or more people within 12 months; or advertise or promote the business to get new contracts so they can do the same work for others.
- Invest in the business by:
- Buying tools or equipment needed to provide the services;
- Paying for the premises or facilities where the services are provided; or
- Paying for licenses, certificates or specialized training.
- Have the right to hire and fire others.
- A person who files tax returns with a Schedule F and also performs agricultural services they report on a Schedule C does not have to meet the independently established business requirements.
Note: ORS 670.600 applies only to Oregon Department of Revenue, Employment Department, Construction Contractors Board, and Landscaping Contractors Board.
For information about workers compensation and Oregon labor law, please contact the Workers Compensation Division and Bureau of Labor and Industries.
What is a 1099-MISC and what does it mean?
A 1099-MISC is the required federal form you must use to report what you pay to a person who is not an employee. Use this form when the pay is over $600 in a calendar year. It tells the IRS about the income you pay to people and partnerships in business for themselves.
The 1099-MISC shows that you treated the person or partnership as an independent contractor. It does not say that the person is actually an independent contractor. In contrast, you give an employee federal form W-2.
For more information, check with the IRS. If you think someone is an independent contractor, you must fill out Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Does the way I pay a person make him an independent contractor?
The way you pay someone is not the only factor. But, it might help you decide if you have direction and control over that worker.
What if I have a signed contract saying the worker is an independent contractor?
A signed contract does not make a worker an independent contractor. The worker must meet the requirements of ORS 670.600 to be an independent contractor.
Can I hire a person from another state as an independent contractor?
A state boundary in itself does not establish an independent contractor relationship. If you hire a person from another state to work for you in Oregon, Oregon law would decide if they are an independent contractor. Likewise, if you send an Oregon resident to work in another state on a temporary basis for an Oregon employer, Oregon law would decide if the worker is an independent contractor.
If an employer from another state hires an Oregon worker to perform services in Oregon, Oregon law would decide the worker’s status.
To find out where workers are reported for unemployment insurance, see Employment Department Informational flyer #9, Multi-State Employment.
Does a professional or trade license make someone an independent contractor?
There is no specific license that creates an independent contractor under (ORS) 670.600.
A professional or trade license represents the legal right to perform services in a specific trade or profession. It does not guarantee that the licensee is an independent contractor.
Is there an independent contractor license?
Not in Oregon. If the worker is licensed with the Construction Contractors Board or the Landscape Contractors Board, they are presumed by Workers Compensation Division to be an independent contractor if they are involved in activities subject to and working under that license.
What are the pros and cons of hiring an independent contractor?
Pros include:
- You are not responsible for providing workers' compensation coverage.
- You do not pay unemployment insurance tax.
- You do not pay Social Security tax.
- You will not need to withhold income taxes or pay local payroll taxes.
- Bookkeeping may be simpler since payments are based on a contracted amount without reporting requirements, other than Form 1099-MISC, which must be sent to the IRS in certain cases.
- There is no need to keep timesheets, hour logs, or salary-based logs.
- You do not need to provide tools, equipment, or materials.
Cons include:
- You cannot supervise closely because the independent contractor chooses the manner and method of doing the work.
- You cannot control who actually performs the service since an independent contractor has the right to hire and fire their own labor.
- You may lose some flexibility in completing projects because independent contractors decide their own schedules.
What are my responsibilities as someone who hired an independent contractor?
Before entering into a contract, you are responsible for making sure the person you hire is an independent contractor under the law.
What are other options for hiring?
You may get workers through an employment service or agency that provides temporary or leased workers.
Can someone become an independent contractor just by forming a business entity, such as a corporation, partnership, or limited liability company?
No. Creating a business does not, by itself, mean that someone is an independent contractor.
ORS 670.600 applies only to the Oregon Department of Revenue, Employment Department, Construction Contractors Board, and Landscape Contractors Board. These agencies require that the person performing the work must meet all the criteria of that law.
For information about workers' compensation and Oregon labor law, please contact the Workers' Compensation Division and Bureau of Labor and Industries.
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