No Clear Definition of Independent Contractor
With the current economic climate many business owners are considering what is the most economical way to structure a business relationship with individuals that may provide work for their business, and many individuals looking for work are seeking a source of revenue working as consultants or independent contractors.
There are federal and state income tax, employment tax and other ramifications for both parties that should be carefully considered.
Are you an Independent Contractor in New Jersey?
This is not an easy question to answer despite the fact that many consider themselves to be independent contractors. According to the New Jersey Business and Industry Association, there is no clear definition of an employee or independent contractor for federal employment tax purposes or for New Jersey gross income tax withholding. Both the federal and state laws use a facts based approach to determining the status of an individual as either an independent contractor or an employee.
The New Jersey Unemployment Compensation Law
The New Jersey Unemployment Compensation Law at 43:21-19(i)(6) provides a test for determining whether a person is an employee or an independent contractor. The test is often referred to as the ABC test. According to the law, an individual is assumed to be an employee of a company for which he performs services unless he can prove the following:
(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
(B) Such service is either outside the usual course of the business for which service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.
Despite individuals claiming to meet the ABC test, the New Jersey courts have found some individuals are not independent contractors. The New Jersey Supreme Court explained in 1991 (in Carpet Remnant Warehouse v. New Jersey Department of Labor) how to apply the ABC test. An individual must show he could stay in business even if the relationship with a company ended. The determination would consider the following factors:
- The duration and strength of the business or enterprise.
- The number of customers and the respective volume of business of each customer.
- The number of employees, if any.
- The extent of tools, equipment, vehicles or other resources.
- The amount of remuneration from the challenged relationship compared to the remuneration received from other customers.
Understanding your rights as an independent contractor or an employee has significant impact on your need for insurance, protection of personal assets, and your estate plan. Experienced Estate Planning Attorney Elga Goodman also has experience in business law and she can help you create a plan to protect your business, your assets, and your loved ones. Call us today at 973-841-5111.
Posted in: Estate Planning