What’s the difference between an employee and an independent contractor?

An employee and an independent contractor can both perform the same job or service, but their relationship with the employer or business owner that pays them is quite different. The main difference between hiring an employee and using an independent contractor to do the work you need to be done is the amount of control you can exercise over them. The IRS defines an independent contract as an individual who is only under the control and direction of the payer for the result of the work done and not under the control or direction for how or when the work is done.

The relationship is not always clear because the definition of control is subject to some interpretation. In cases where there is some question about whether an individual is an employee or an independent contractor, it is best to examine some of the factors that may indicate the payer is in control.

  • Work is being done in the building or on the property of the payer
  • Payer is supplying tools, equipment, or supplies needed to complete the work
  • Payer requires the work to be done during certain hours
  • Payer gives worker a detailed list of how the job is to be done
  • Worker must report to the payer on the daily progress of the work being done

Taken individually, none of these factors is sufficient to definitively prove that a worker is actually an employee and not an independent contractor. A company might hire a specialist to do an audit of their freight bills. They could provide the auditor with a conference room, access to a computer, and ask the auditor to do his audit during regular office hours. That person would still be classified as an independent contractor.

So which is better?

When you hire an employee you have to pay unemployment, Social Security, and Medicare taxes. You also may incur costs for benefits such as health insurance or a retirement plan. You are not typically responsible for any of those costs when you engage the services of an independent contractor. However, an independent contractor comes with a higher rate and less control. You have to weight the pros and cons of each classification to determine what is best for your company’s needs.

While it is tempting, from a financial point of view,  to try to classify the people who work for you as independent contractors when they are really employees, the IRS frowns on such a practice. Employers who may be guilty of inaccurately classifying  their workers can participate in the IRS Voluntary Classification Settlement Program, and lessen the penalties they may be subject to for categorizing employees as independent contractors.

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