5 Key Differences Between Employees and Independent Contractors
A person doing a job is the same as another person doing a job, right? Not necessarily. In the murky world of employment law, just because you do the same thing doesn’t make you the same thing. Case in point: independent contractors and employees. One is not like the other. Here are five important differences that you should know.
1) Taxes: Perhaps one of the most significant differences between independent contractors and employees is that employees have their taxes withheld from their paychecks each pay period by their employers, who then remit those monies directly to the IRS. Independent contractors, on the other hand, do not. This means that an independent contractor must report their income to the IRS and pay the appropriate income, social security, and Medicare taxes directly to the government, usually on a quarterly basis. Businesses that hire independent contractors must issue these contractors 1099 forms, which are also reported to the IRS for any payments to a contractor of $600 or more during the calendar year.
2) Benefits: Like taxes, independent contractors must supply their own benefits. They are usually not eligible for company benefits, which is another reason businesses find independent contractors so attractive. The trade off to this for independent contractors is that they are free to shop around for health insurance and can make their own rules on vacation, overtime, and other administrative matters.
3) Compensation: Contracts with independent contractors usually are paid in either a set, prior-agreed upon amount, or by some hourly rate that the contractor charges. Employees, on the other hand, are usually salaried or hourly.
4) Laws: Another big difference between independent contractors and employees is that, depending upon the size of the company, employees are protected by federal and state employment laws. Independent contractors are not.
5) The IRS Factors: Not surprisingly, the IRS has a lot to say about the differences between employees and independent contractors since they are directly affected by the different tax treatment. One of the bigger issues that the IRS faces in this landscape is employers who misclassify regular employees as independent contractors, thus potentially missing some of the reporting and withholding requirements. As a result, the IRS has established a complex set of questions to determine whether or not a person is an employee or an independent contractor.
As far as the IRS is concerned, what makes an employee an employee is that they work at the control or direction of others, they are given training for their work, and they work for just one employer. Independent contractors, on the other hand, usually operate under a business name, may have their own employees, maintain a separate business checking account, invoice clients for work performed, work for more than one employer or client, have their own supplies (i.e. computers, software, etc) and tools, set their own hours, and keep business records.
If you are an employer, it is vitally important to understand the difference between an independent contractor and an employee for all of the reasons listed above. This will directly affect how you treat this person with respect to taxes, benefits, compensation, and reporting. If you are an individual, it is equally important to understand the difference between the two because your rights and responsibilities vary widely depending upon which one you are.
In either case, it is essential to consult with counsel who understands these differences and can help you understand how those differences affect your particular situation. Contact the Law Firm of J.W. Stafford, L.L.C., today to see how we can help.