On March 11, 2024, the new rules that the U.S. Department of Labor created to clarify the classifications between independent contractors and employees went into effect. Many employers and freelance contractors have wanted a better distinction between what constitutes the difference and this document is the final rule on that issue.
Some employers preferred classifying contractors as non-employees because it would save them a lot of money since they would not have to pay them overtime or minimum wages, give employee benefits, withhold taxes, pay for half of their social security/medicare and they would enable them to let them go without any reason.
On the other hand, independent contractors often prefer not to be employees because it gives them more liberty than an employee, such as they can work the hours they want (flexibility). They also enjoy having their own business and being able to put into it the number of hours they want.
Investopedia says it could change the classification of as many as 22.1 million Americans.
The general unwritten rules have always been that if you hire someone as an independent contractor to do a job for your business, you can tell them what needs to be done and by when it needs to be done. You can not tell them when they are to work, or how they are to work.
In 1938, the Fair Labor Standards Act (FLSA) created the original laws that distinguished employees from contractors. The new ruling could mean that employers who violated the rules in the past could owe back pay, overtime pay, out-of-pocket expenses, social security/medicare payments and may face criminal penalties for misclassifying employees.
The new Department of Labor independent contractor test provides six considerations to distinguish an employee from an independent contractor. None of the factors has more weight than any other. They are:
- Opportunity for profit or loss—based on their business knowledge or ability.
- Investments by the worker and the employer—Do they invest in expanding their business like an employer?
- Permanence of the work relationship—Is the relationship limited by time or project?
- Nature and degree of control—Does the person determine their schedule, quality of work, or salary?
- Is the work performed integral to the employer’s business—Is it necessary to the business—or is it an independent function?
- Skills and initiative—Does the person bring specialized knowledge and skills to the task, or are they learned from the employer?
Two industries likely to be affected the most are health care and construction because they regularly practice misclassification. FinanceBuzz says other industries that will be affected most include rideshare and delivery services, nannies, task services, dog walkers, and personal chefs.
Side Hustle Income May Be Reported to the IRS
Even if you are not a 1099-NEC employee, but receive your pay through places such as PayPal, Stripe, or Venmo, your income has already been reported to the Internal Revenue Service (IRS) on the new 1099-K form. Be sure you keep accurate records of your income and expenditures as a self-employed independent contractor. You must pay taxes from your side hustle by making estimated tax payments or with your tax return, and you will have to pay all of them because there is no employer to take them out for you. This means that at a minimum, 25% of your net profit goes right to the federal government (plus more to many states).
Reductions in Social Security Benefits
Seniors getting Social Security benefits and earning extra income may have reduced benefits if they make too much money. If you take your social security benefits early, the Social Security Administration says you can earn up to $22,320 in 2024 without any penalties. Any amount above that will be taxed and you will have your benefits reduced by $1 for every $2 you earn. In the year you reach full retirement age, you can earn up to $59,520, and any money earned above that amount reduces your Social Security benefits by $1 for every $3 you bring in.
Things to Take into Consideration
If you company wants to change your status for employee to independent contractor, you probably will want to negotiate a higher wage to compensate for the extra cost to you. Often though, companies will tell you if you don't like the arrangement you can find another job.
There are still many gig-type jobs that the rule will not impact or may impact only minimally, so you just may need to find a new one to pull in a similar amount of income. Before you take on a new gig job or enter new contracts as an independent contractor, be sure to find out how the new rules might impact you. Make sure everything is in writing and avoid unscrupulous employers.