In today’s ever-changing work environment, more people work as independent contractors than traditional employees. Also known as freelancing, this status offers the flexibility to work on your own terms, choose your clients, and manage your workload. However, in a state like Arizona, some specific rules and regulations draw the line between an independent contractor and an employee. Maintain your independent status in several ways.
What Does It Mean to Be an Independent Contractor?
First, you must fully understand what it means to be an independent contractor. Simply put, an independent contractor is a self-employed individual who provides services to clients under a contract. Unlike employees, independent contractors have control over how they complete their work. They are not subject to the same level of supervision by the hiring party. For instance, if you are hired to create a website, you decide how to design it. Planning what tools to use and when to work on it, would be up to you. In short, the client cares only about the final product, and not how you get there.
Key Differences Between an Independent Contractor and an Employee
There are key differences between an independent contractor and an employee. In Arizona, the distinction is defined by several factors, based on the level of control and independence.
For example, employees are often required to:
- Follow specific work schedules
- Use company-provided tools
- Adhere to company policies
In contrast, independent contractors typically:
- Set their schedules
- Use their equipment
- Are not subject to company rules
According to the Arizona Revised Statutes (ARS), there are specific criteria to determine whether an individual is an employee or an independent contractor. ARS § 23-902(C) provides that independent contractors are not considered employees for workers’ compensation purposes if they meet certain criteria, such as:
- Having an independent business
- Holding themselves out to the public as independent contractors
- Having the right to control the manner and means of their work
How to Preserve Your Status as an Independent Contractor
To maintain your status as an independent contractor, it’s important to adhere to best practices. Also, be mindful of the factors that distinguish you from an employee. Here are some tips:
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Maintain Control Over Your Work
Always have a contract that clearly outlines the scope of work, payment terms, and deadlines. The contract should emphasize that you control how the work is performed, as this is a key indicator of independent contractor status. For example, you are a graphic designer entering into a contract with a local business to create a logo. The contract should specify your design responsibilities, submission deadlines, and payment schedule. It should also state that you are responsible for your tools and methods.
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Use Your Equipment
Whenever possible, use your tools, software, and workspace. This demonstrates your independence and investment in your business. For example, if you’re a graphic designer, using your computer and design software rather than the client’s equipment reinforces your status as an independent contractor. So, if the task entails you to use new programs or applications, the decision to do so is entirely up to you. You may either use your current software or take the opportunity to expand your skill set. Having the freedom to choose will help you achieve your desired output.
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Set Your Hours
While you must meet deadlines, setting your hours and deciding when to work is important. For instance, if you prefer working late at night, your clients should not dictate otherwise, as long as you meet your obligations.
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Market Your Services
Actively market your services to multiple clients. This not only increases your income potential but also shows that you’re running an independent business. Creating a professional website, using business cards, and advertising your services online are effective ways to attract clients. Moreover, The Arizona Department of Economic Security considers whether a worker provides services to multiple entities as a factor in determining independent contractor status.
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Avoid Long-Term Contracts
While it’s not always possible, try to avoid long-term contracts that may resemble an employment relationship. Short-term or project-based contracts are better for maintaining your status as an independent contractor. Furthermore, a long-term contract may lead to a permanent job offer which may enable your client to control the way you work and affect your creative freedom.
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Comply with State Laws
Familiarize yourself with specific Arizona statutes and regulations regarding independent contractor status. Independent contractors should operate as a business, with proper registrations, licenses, and business practices. Thus, you must have a business bank account, and a business license to operate in Arizona.
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File and Pay Taxes
Arizona conforms to federal tax laws regarding independent contractors, who are responsible for reporting and paying taxes on their earnings. Failure to properly report income can lead to penalties and interest charges. Therefore, you must pay your self-employment taxes, including Social Security and Medicare, and file Form 1099-MISC for income received.
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Importance of Preserving Independent Contractor Status
Maintaining your status as an independent contractor is essential for several reasons. First, it affects your tax obligations. This differs from employees, whose employers withhold these taxes from their paychecks. Moreover, independent contractors can deduct business expenses, such as home office costs, travel expenses, and equipment purchases, which can significantly reduce taxable income.
Second, preserving this status ensures that you retain the flexibility and control that come with being self-employed. You can choose the projects you want to work on, set your rates, and manage your work-life balance. Losing this status could mean losing such freedom and being subject to an employer’s control.
Lastly, being an independent contractor will help you maximize your earning potential. You can accept as much work as you can handle and charge your services according to the fair market value. You can choose to retire early or work beyond the retirement age if you still can. It all depends on you.