So, you found the perfect addition to your team. But wait, are they an employee or an independent contractor? Don’t worry; we’ve got you covered.
In this guide, we’ll break down the key differences between employees and contractors and help you make the right classification.
And trust us, getting it right matters. Misclassifying a worker can mean they miss out on important legal protections and benefits. More importantly, it can lead to headaches and fines for you, the employer.
Don’t fall into the misclassification trap – read on to learn more!
Independent Contractors vs. Employees: What’s the Difference?
Let’s break it down! Independent contractors are like business owners who work on short-term projects for companies. Employees, on the other hand, work on a regular basis for a single employer. It’s pretty straightforward in some cases, like if you hire an IT professional to set up your computer network.
They’re definitely an independent contractor. However, it can get a bit fuzzier when you bring on temporary workers to help with a big project.
Let’s take a look at each:
Employees
- Work at a specific time and place set by the employer
- Generally work for just one company
- Receive training
- Use the employer’s tools or other work-related resources
- Do work that is an integral part of the employer’s business
- Are subject to a large degree of control by the employer
- Are generally paid a salary or hourly wage
- Why does it matter? Because employees…
- Often receive employee benefits, like health insurance and paid time off
- Are subject to financial deductions such as income tax and Social Security tax, among others
- May join a union
- Are protected by state and federal laws for overtime, minimum wage, and employment discrimination
Independent Contractors
- Can work whenever and sometimes wherever they’d like
- Can work for multiple companies simultaneously or in the same year
- Are not trained by the employer, rather are hired for their expertise
- Use their own tools and resources
- Control their own method of work
- Are often (but not always) paid by the project or on a flat-fee basis
Why does it matter? Because independent contractors…
- Do not receive employment benefits
- Pay their own taxes and are not subject to other withholdings
- May not join a union
- Generally do not receive overtime or protection for employment discrimination
To help define the line between employees and independent contractors, we look to the IRS, the Fair Labor Standards Act, and common law.
When determining whether a worker is an employee for federal tax classification purposes, the IRS looks at three defining areas: behavioral control, financial control, and the type of relationship.
Behavioral Control
Let’s talk about behavioral control first. If you’re an employee, you’re working specific hours and at a location chosen by your boss. Plus, you won’t need any of your own tools or resources because the company’s got you covered. And you’re at the mercy of who the company hires for your co-workers or team members. Not to mention you’ll be answering to your boss on the regular.
But if you’re a contractor, you drive the bus. You decide when and where to work, and you can bring your own tools to the party. Need some extra hands? No sweat, you can hire your own crew and be the boss of your own destiny.
Financial Control
Let’s take a look at the financial side of things. When it comes to payment, employees are given a regular wage set by their employer, with taxes already withheld from their paychecks.
But for contractors, it’s a whole different ball game. They’ve got skin in the game. Contractors have invested their own money into their business, so they have a financial stake in its success.
Plus, payment terms can vary from hourly to project-based fees with retainers, and they usually invoice for their time and/or deliverables. No taxes are withheld, so it’s up to the contractor to make sure they pay their fair share in taxes.
Relationships
Do you know that cozy feeling you get when you find your perfect match? Well, the same goes for employees and business relationships. Employees perform the work that keeps the business running, while businesses provide a safe and comfortable working environment.
Now, contractors are like the cool cousins who visit town for a short visit. They’re experts in their field and bring a unique set of skills to the table. You might hire them for a specific project, like painting a mural or organizing a charity event. But don’t get too attached because their stay is usually temporary.
Just remember, the line between employee and contractor can be blurry at times, so make sure to consult the IRS guidelines before making any commitments.
For tax purposes, the IRS examines three areas to determine whether a worker is an independent contractor or an employee: behavioral control, financial control, and the type of relationship. So make sure you know the difference – both for your own business and for the sake of your workers!
The Wrap – Independent Contractor vs. Employee:
These guidelines can help you out, but let’s face it, there’s no one-size-fits-all answer. Take, for instance, a super chill worker who uses their company laptop and decides to work from a beach in Bali for 40 hours a week.
They may still be considered an employee! Crazy, right? There are so many factors to consider when figuring out whether you’re dealing with an employee or a contractor.
But don’t worry, if your head is still spinning with confusion about how your workers should be classified or you have a particularly complicated situation, schedule a consultation with our office, contact us online, or call (972) 893-9340.
