Employee vs. Independent Contractor: Spot the Differences
As a business owner, you most likely have employees or independent contractors (or maybe a combination of both) working for your company. An employee is generally anyone who performs services for an employer, and to which the employer has the right to control what services will be done and how. On the other hand, an individual is considered an independent contractor if the “payer” only has the right to control the result of the services, and not how it is done. For both legal and tax reasons, it’s important to classify individuals correctly. For example, if you mistakenly classify an employee as an independent contractor, you may be responsible for unpaid employment taxes. While the IRS offers a number of “tests” that assist in determining the status of a worker, we’ve compiled the most common differences between an employee and an independent contractor to help you avoid misclassification.
Control and Exclusivity
Arguably the most fundamental difference between an employee and an independent contractor is the aspect of control. As alluded to above, a business 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 only work exclusively for that employer. Conversely, a business 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 business. The aspect of control is also relevant when it comes to payment for a worker’s services.
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). Instead, an independent contractor may submit invoices for their work 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 small businesses, some employers provide various benefits to their employees such as health, dental, and life insurance, in addition to 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
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 withhold taxes for independent contractors you engage. An employee will complete a W-4 form, while an independent contractor will complete a 1099 form (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 is generally designed for employees.
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 business 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 firstname.lastname@example.org.