Employee vs Independent Contractor: Everything to Know
Understanding the roles of employees vs independent contractors keeps workers and companies out of trouble. The first is self-employed while the second is not.3 min read
What Is an Employee vs Independent Contractor?
Understanding the roles of employee vs independent contractor keeps workers and companies out of trouble. An independent contractor owns and operates a business while an employee follows the directions of an employer. The first is self-employed while the second is employed by a company.
What Is an Independent Contractor?
An employer or owner of a business hires a skilled independent contractor to do a specific task. The individual completes the task with little or no supervision from the owner or operator of the business.
- own their own businesses
- do not work for an employer
- are not protected under the law as employees are
- can't get unemployment insurance or health insurance
- pay all their social security taxes instead of having their employer pay 6.2 percent.
- have the authority to set their hours and prices
- decide which projects to pursue
- usually do business from home or a private office
Financially speaking, the contractor does not receive input from outside parties. A contractor demonstrates a knowledge base in order to get hired. Independent contractors cannot receive workers’ compensation if hurt on the job and are not protected by anti-discrimination or workplace safety laws. Unions do not protect their interests.
An independent contractor completes a task for a specific fee. The fee is final and does not take into account hours worked to complete the task.
What Is an Employee?
Employers offer trainings to employees in order for them to become more specialized or be more valuable to the company. A team atmosphere defines how employees contribute to the company.
- receives guidance from a supervisor
- is given a specific number of hours to complete a task
- usually completes the task on company property, unless the owner permits the employee to work off-site
- has access to medical benefits and disability insurance
- can most likely receive unemployment compensation
- is eligible to receive workman's comp
- benefits from protection under the anti-discrimination umbrella
- benefits from labor laws for wages and overtime
- can seek protection from a union
Who Monitors the Company's Decisions?
In the eyes of the IRS, every worker is either an independent contractor or an employee. Misclassifying an employee as an independent contractor happens in almost one-third of U.S. companies. It is much less expensive for a business to hire a contractor and not have to provide security, insurance, sick leave, or personal time. For that reason, if hired workers are not aware of the pros and cons of each label, they can easily be taken advantage of.
The IRS, the state's tax department, and the state's worker's compensation insurance agency have the right and obligation to review companies' hiring practices to see if they are classifying workers correctly. If a company is found in violation, it will receive a fine and must change the independent contractor's title to an employee and pay that person back taxes.
Unfortunately, the change in title could cause the employee to lose valuable business tax deductions. The three government agencies mentioned above have the final say on the classification of a worker. If the hiring entity controls the worker, then the professional is considered an employee. The company may choose not to exercise its right to supervise the skilled person closely, but legally it has the authority to do so.
Many times, there are differences of opinions between the government agencies and the companies. Labeling a worker as an independent contractor releases the company of the big financial burden of providing medical insurance, distributing W-2 forms by January 31, and paying social security taxes.
How Does the IRS Define an Employee vs an Independent Contractor?
The IRS, along with many states, define independent contractors similarly. The definitions focus on the authority the employer has with the worker. If the company defines how a job should be accomplished, it solidifies the relationship as one between employee and employer. Also, if the work is an integral part of the business, the relationship is one of employee and employer.
When a worker does not rely on the business for a sole source of income, creates a personal timeline based on an agreement with the company, and exhibits independence, the title of an independent contractor is appropriate.
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