Independent Contractor vs. Employee

What’s the difference?

As an employer, it is essential that an employee be classified properly, since misclassification of a worker can result in additional taxes, interest, and penalties to your business.  An independent contractor is not an employee of the business.  Independent contractors take on clients who pay them for services rendered.  The primary consideration in determining whether a worker is an independent contractor is the level of control that contractor has over their own job function.  In other words, a person could likely be classified an independent contractor if that person is someone whom the employer has the right to control only the end result of the work and not how the work is done.  What does this mean?

The level or degree of control that an employer has over the independent contractor’s daily work and schedule affects the classification of the worker.  In general, the higher or greater the degree of control, the more likely the worker is to be classified an employee and not an independent contractor.  Consult with a qualified tax attorney for advice on proper classification of an employee or independent contractor.

Independent Contractor Basics:

The independent contractor is often a services employee who is tasked for a particular job or project and the way they accomplish the result, the hours that they work, and how it is carried out, is determined solely by the independent contractor.  An independent contractor can be a lawyer, electrician, janitor, retail clerk, or any other job in which the contractor has control over how the job is carried out.  If a worker is an independent contractor, the employer does not make any payroll deductions on their taxes, does not provide benefits, does not support a 401K plan, and cannot control how the work is done.  The worker is responsible for filing their own taxes, obtaining their own benefits and contributing to their own retirement.  The job of an independent contractor is to accomplish a stated job, and it is largely up to the independent contractor to determine when they work on the job and how that job is done.

Employee Basics:

On the other hand, an employee is a worker whom the employer “can control what will be done and how it will be done.”  Most people who fall under this category will work either full time or part time for an employer, they are subject to the employer’s human resources guidelines, employee handbook, and their benefits (if any) and pay taxed accordingly.

Do employment laws apply to independent contractors?

No.  As an employer, you may already know that employment laws are not intended to protect independent contractors, those laws apply to employees of the business. Thus, the following applies to workers classified as independent contractors:

  • Overtime Pay is not required to be paid to independent contractors
  • Minimum wage rules do not apply to independent contractors
  • Benefits are not required to be provided to independent contractors
  • Taxes (e.g., Federal, state, Social Security/FICA) are not required to be withheld by the employer for the independent contractor.  It is the responsibility of the independent contractor to file their own taxes.
  • Independent contractors are not entitled to unemployment benefits from the state

As an employer, why would I want to hire an independent contractor?

A company may consider hiring an independent contractor when the business is small, and the company does not want to deal with the burden of processing payroll and providing benefits.  In addition, small businesses can eliminate the need to file taxes on behalf of their workers, and reduce overhead with independent contractors.

Keep in mind that an independent contractor is not bound by the employer’s rules and human resources policies, and thus may be less likely to be loyal or feel a particular affiliation with the employer.  Also, because the independent contractor has the ability to choose the project or work that they do, there may be a lessened degree of control over the independent contractor.






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