Employee vs. Independent Contractor: Spot the Differences
Updated: Sep 23
As a practice owner, you may very well have providers working for you as independent contractors. While it can be tempting to categorize someone as a contractor for tax-saving purposes, it is important to note that a misclassification of employment status can result in back-tax payments and penalties by both the Internal Revenue Service and your state department of revenue. The reason for the vastly different treatment of workers stems in part from the fact that an employee is truly working for another's entity or organization, while an independent contractor is effectively running their own mini business. While the IRS offers a more comprehensive list of "tests” to assist in determining the status of a worker, we’ve compiled some of the more common considerations when deciphering between an employee and an independent contractor.
Control and Exclusivity
Arguably the most fundamental difference between an employee and an independent contractor is the aspect of control. Let's first consider the case of employees. A practice owner has the right to control an employee’s scope of work and how they complete that work. Employees tend to have a set schedule, which is determined by their employer, and generally work exclusively for that employer. Conversely, a practice owner does not have the right to control how an independent contractor completes the work they were hired to perform. In addition, contractors generally set their own schedule, and oftentimes don’t work exclusively with one practice.
Compensation and Benefits
An employee typically receives a specific salary or hourly wage determined by the employer, and receives that salary or wage on a weekly, biweekly or monthly basis (also determined by the employer). An independent contractor, however, may submit invoices for their work and/or will receive compensation once the scope of work is completed. An employee will generally receive their salary or wage in accordance with whichever method the employer determines, but an independent contractor usually retains that right. While not always the case for healthcare practices, some employers provide various benefits to their employees such as health insurance, retirement plans, stock options, overtime, paid time off and paid vacation/sick time. These types of benefits are exclusive to employees and are not available to independent contractors.
Taxes and Workers Compensation
As noted above, one of the biggest risks of misclassifying an employee as an independent contractor is the potential tax consequences. As an employer with employees, you are required to withhold taxes, but you are not required to do so for independent contractors. An employee will complete a W-4 form, while an independent contractor will complete a 1099 (this is why independent contractors are often referred to as “1099s”). Furthermore, independent contractors receive less legal protections, such as unemployment and workers compensation, which are generally designed to protect employees.
Non-Competition Clauses
Sweeping reform across the country has increasingly banned or cut back on the enforceability of non-compete agreements. To be clear, in many states, non-competes are still enforceable. However, they must meet a number of requirements, including being "reasonable" in scope (a discussion for another day). Assuming you live in a state that still enforces non-competition agreements, you must be cognizant of a worker's employment status. While a non-compete may be enforceable against an ex-employee, it likely will not hold up against a former independent contractor. Again, turning to the idea that a contractor is really running their own business, a practice owner cannot unilaterally limit that person from offering their services elsewhere.
While this is merely an overview of what we believe are the most important differences between an employee and an independent contractor, we encourage all practice owners to ensure that all of their workers are classified correctly. Having a strong employment or independent contractor agreement in place can assist in this classification, and Marti Law Group is happy to provide these services. Contact us at 860-552-7770 or info@martilawgroup.com.