Hiring independent contractors help businesses in many aspects, especially in reducing cost and efficiency. However, companies should be familiar with the legal requirements when hiring independent contractors to avoid the risk of misclassification, which could result in significant financial penalties and taxes. Hiring an Agent of Record (AOR) is a practical solution for companies to manage all legal and business matters related to working with or requiring the services of an independent contractor.
What is an Agent of Record (AOR)? How does it differ with an Employer of Record (EOR)? When do businesses need to hire an AOR?
What is the difference between an EOR and AOR?
An EOR legally manages the employment requirements, usually of the contingent workforce or workers classified as W2 employees, on behalf of the client company operating their business overseas. AOR, on the other hand, has similar roles with EOR but has differences as well in terms of administering the employment requirements, payroll and government compliance of independent contractors for staffing firms or the client company.
What are the different employee classifications for tax purposes? In the US, independent contractors fall under the 1099 classification. An independent contractor is defined as a worker who is self-employed or who owns the business and works on a contract basis. However, the definition can sometimes be confusing for many but the IRC has set up three categories to determine whether a worker is considered as an employee or an independent contractor.
| Self-employed workers who:
|A worker acting through a corporation and in agreement with another corporation for a commercial relationship. The:
Three categories by the IRC:
As mentioned earlier, worker classification can become confusing or blurry for many. Here are the three major categories by the IRC to identify if a worker is classified as W2 or 1099 based on the degree of control or independence of the business or the worker:
- Who controls and provides extensive instructions about the work?
- Who provides the tools and equipment?
- Who provides the training?
- Does the worker have any significant economic investment in the project?
- Is there a reimbursement for business expenses?
- What’s the method of payment for the worker (regular salary or fixed rate)?
Type of Relationship
- Does the worker receive employee benefits?
- What are the terms of the relationship in the agreement contract?
- What’s the permanency of the relationship in the agreement contract?
What are the responsibilities of an AOR?
The AOR facilitates the following:
- Backgrounds checks and drug screens
- Risk mitigation for independent contractor compliance
- 1099 tax document delivery
- Government reporting requirements
- Statement of work execution
- Contract management
When to hire an AOR
Independent contractors and companies both benefit with an AOR. The AOR guides independent contractors in understanding their status requirements. Client companies, on the other hand, should hire the expertise of an AOR when:
- the business or staffing agency has multiple locations in different states or countries
- The business hires multiple independent contractors in different states or countries
- when a startup or small business plans to scale and don’t have time to on-board
CXC is a global HR outsourcing organization with 30 years of experience in workforce management. Our innovative and cost-effective solutions help companies gain a competitive advantage by improving efficiency while reducing risks.