Differences Between Employees and Independent Contractors for ACA Purposes

February 16, 2016

By Jim Gerhard

Businesses have long utilized independent contractors as a means of leveraging the highly trained services of other professionals. Independent contractors provide their own tools, training and expertise. This saves the hiring company the cost of teaching someone how to do the job.. When the work is done, the hiring company simply pays the agreed-upon fee, and both parties go on their way.

But are contractors always independent? The Affordable Care Act has given this already important question a renewed sense of urgency.

As outlined in the Affordable Care Act, companies that employ 50 or more full-time workers are required to make affordable health insurance available to their employees. The ACA defines an employee as anyone working a minimum of 30 hours a week. But be careful, as the hours of part-time employees can be combined to create their “full-time equivalent.”

Below are a few examples illustrating the difference between employees and contractors, as well as circumstances that may inadvertently convert an independent contractor into an employee.

Who’s in control?

Let’s say you hire an independent contractor to fix your furnace. An independent contractor would estimate when he or she could begin the work, as well as provide an estimated timeline for its completion. He or she decides things such as when to break for lunch and what tools to use. By dictating the “when” and the “how” in regard to the project’s performance, the contractor is displaying the characteristics of independence.

Long-term or project-based?

In the previous example, the contractor is obligated to fix the furnace. Once that project is complete, his or her commitment to you is satisfied. Of course, you are free to contract with that person again as many times as you’d like, but, unlike employees, the independent contractor has no reason to expect continuous or recurring employment with your firm. This is an important distinction, as we have seen some confusion as it pertains to seasonal help.

Steady pay?

A life of independence comes at a cost, and that cost is usually the comfort of a steady paycheck. Independent contractors are in business for themselves. As such, they forego the certainty of steady pay in search of unlimited income.

If you find yourself wondering if any of this applies to you, contact your CPA. That call could be your most valuable investment.