An employee works for one company and is therefore subject to the rules and obligations set forth by that company. A contractor, by contrast, has the choice to work for one or multiple organizations; in fact, it is common for contract workers to juggle several clients at one time.
This level of flexibility can be seen as a benefit or a limitation, depending on what type of work-life balance the person is seeking. For example, contractors can take time off whenever they feel like it, but they do so at the cost of not making money during that time. Key takeaway: Differences between contractors and employees involve pay, taxes, benefits, autonomy, flexibility, expertise, onboarding and training.
The IRS looks at certain factors to see if a worker should be classified as an independent contractor or an employee of a company. Attorney Christy L. Foley said these questions can help you determine how to classify a worker:.
Key takeaway: When determining whether to classify workers as an employee or a contractor, consider when, where and how they do the work; how they're paid; and whether company-specific training is required, among other factors.
The consequences for misclassification vary depending on whether the misclassification is deemed intentional. In extreme cases, he said, businesses could face criminal penalties, and a worker who has been misclassified could be entitled to overtime pay for time worked in excess of 40 hours per week, as well as additional monies, such as punitive or liquidated damages if the worker is successful in a lawsuit against the company.
Foley added that, besides monetary consequences, there can also be disputes over who owns the work that was created. Key takeaway: Worker misclassification can have monetary and legal repercussions. Additional reporting by Skye Schooley.
Some source interviews were conducted for a previous version of this article. How to distinguish an independent contractor from an employee. Contract Workers vs. Jennifer Post. Learn the key differences between contractors and employees so you can hire the right type of workers for your business.
An employee is on a company's payroll and receives wages and benefits in exchange for following the organization's guidelines and remaining loyal. A contractor is an independent worker who has autonomy and flexibility but does not receive benefits such as health insurance and paid time off. Misclassifying a worker can result in back taxes, fines, penalties and legal disputes. This article is for business owners who want to understand how to classify their workers.
What is a contractor? Contract worker versus employee There are many differences between a contractor and an employee. Here are some factors to look at when distinguishing between the two: Payment, taxation and benefits One of the biggest differences between contractors and employees is the way they are paid and taxed.
Autonomy Another major difference between a contractor and an employee relates to their level of independence. Onboarding and training The onboarding and training processes also differ greatly between contractors and employees. Hiring goals Schneiderman said the hiring goals for employees and contractors are also different.
Flexibility Another difference between an employee and a contractor is the degree of flexibility they have in their work. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics.
Worker misclassification can result in fines, penalties, lawsuits, and reputation damage. Independent Contractor vs Employee: 10 Differences. Facebook 0 Twitter 0 Linkedin 0 Email 0 0 X. What is an Employee? What is an Independent Contractor? Misclassification Risks Self-employment is now a viable career option for more people than ever before, and more companies are seeing the benefits of engaging independents vs employees.
Relationship Independent contractors may be sole proprietors, or have an incorporated business. The business-to-business relationship Think of your relationship with an independent contractor as a business-to-business relationship.
Expertise While employees typically receive some sort of training surrounding their job duties, independent contractors bring specialized expertise to a project or task. Control Remember, because independent contractors are running their own business, they need to sell and market their services. Task completion Unlike traditional employees whose jobs may encompass a wide variety of duties and tasks, independent contractors are only responsible for performing the services outlined in a contract or Scope of Work SOW.
The importance of a SOW A clear SOW provides the foundation for a good working relationship, outlining the expectations of both parties. Payment Rather than working for a specific salary, independent contractors submit invoices for their work. Bill rates Independent contractors may have a standard billing rate for their services, or their rate may vary depending on the type of work you are looking for.
Work hours Because independent contractors are their own business entity, a client cannot determine their work hours. Oversight While employees typically receive instructional oversight from a manager, a client cannot determine how an independent contractor works.
Avoiding control If a project requires specialized equipment that is only available on site, this should be stipulated in a contract. Benefits There are many financial benefits to engaging independent contractors, including not having to provide traditional benefits such as health insurance, stock options, or retirement plans.
Partnership Independents may have their own employees, subcontractors, or partner consultants who help them to complete work tasks. Mitigating misclassification risk Partnering with an experienced firm can help you navigate complex classification processes and procedures.
Related Posts. As the million-strong independent workforce continues to grow, so does the issue of employee misclassification. Learn more about the MBO Platform. For Independent Professionals. Start, run, and grow your independent business with MBO. Learn More. You must withhold payroll taxes from employee pay, but you don't withhold taxes from payments to independent contractors. The IRS determines worker status for these purposes. Worker status IC or employee is also important for pay and benefits status.
Only employees are protected by the Dept. This act sets rules for minimum wages, overtime, child labor, OSHA, and other protections. Because IRS and DOL rules are different, a worker may be classified as an employee under one rule and as an independent contractor under another.
Get help from an employment attorney to figure this out for your business. The IRS uses three basic rules to determine the type of business relationship between the worker and employer, based on the degree of control and independence of the worker.
Behavioral control looks at the degree of control the employer has over workers. Does the employee give many detailed directions, including where and when to do the work? Does the employer do training implying that the worker may not be skilled already? Does the employer have evaluation systems built in to monitor worker performance? Does the worker bring their own tools and supplies, or does the employer provide them?
This factor includes how the worker is paid, whether the worker may work for others at the same time, and whether the worker can incur a profit or loss. A worker who is paid a salary is restricted from working for others, and who does not participate in company profits or losses, is probably an employee. The presence of a specific contract may indicate an independent contractor, but this factor alone is not controlling. If the worker is entitled to benefits, this would indicate an employment relationship.
Another factor would be the type of work the person does; if it is directly related to the company's core work, they are probably an employee. For example, a maintenance worker would not be doing 'company' work if they were working for a bank. The IRS looks at employee vs. They assume the person is an employee. It is sometimes difficult to determine the status of a worker, but if you are unsure, assume the worker is an employee in the eyes of the IRS.
If you want to find out whether to classify a worker as an independent contractor or employee, you can file a Form SS-8 to request a determination from the IRS.
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