The Difference Between Employees and Independent Contractors

This might be on a temporary basis, for a specific project, or for certain duties on an ad hoc basis. Although contractors are still subject to certain obligations, such as complying with a confidentiality agreement, they will usually work for other clients too so they don’t have the same level of loyalty and commitment as employees. Contractors define their own rates and payment terms, and issue invoices for all completed work. Retainers are also common for contractors who work with a company on a regular basis or who require advance payment for supplies.

A misclassified employee can also result in financial claims including reimbursement for overtime, retirement contributions, or social security contributions, amongst other benefits. Make sure you are aware of all your obligations relating to both your employees and your independent contractors. It’s important to consider the possible drawbacks of being an independent contractor, such as financial instability and lack of job security, even as the benefits, such as autonomy and earning potential, are enticing. Your career objectives, financial situation, and risk tolerance should all be considered while deciding between independent contractor and employee status. For one, employees are protected under the Fair Labor Standards Act (FLSA), which requires time and a half overtime pay.

Pros and Cons of Being an Employee

They are willing to do things your way in order to be part of a team and to have someone else take on business risks. It allows you to mentor your employees, earn their loyalty, and build a trusting partnership. Although those advantages can’t be measured, they provide significant value to any business. Whether you’re hiring independent contractors or employees, you will need to have some sort of contract. An employment contract will likely be pretty extensive, including employment benefits, work hours, sick day and vacation policies, etc. Their contract will have to define the scope of the work even more carefully than an employee’s contract, but won’t include a lot of the details about taxes, insurance coverage, etc.

For many business owners, the employee v independent contractor decision comes down to the type of relationship you want to create. You put in a lot of responsibility and you get back loyalty and control. Having an employee means you have independent contractor vs employee to cover certain employment benefits and may not be able to let go of your employee whenever you want. On the other hand, you get to decide where, when, and how your worker does the job, and can even train them to do it a certain way.

Misclassified Workers Can File Social Security Tax Form

Their employer must withhold a portion of employees’ paychecks for Federal Insurance Contribution Act (FICA) taxes, state income tax, and federal income tax. Since the introduction of virtual marketplace companies (VMC’s) like Uber, there has been some confusion about what is means to be an independent contractor vs. an employee. The important distinctions between these two worker classifications can seriously affect a worker’s wages and what taxes are paid by the worker or by the business. Get to know the difference between being an independent contractor and an employee to determine which is the right path for you. It is not defined by what the relationship is called by the participants. The courts have found that no single factor or group of factors conclusively define an employer-employee relationship.

For more information, refer to Publication 15-A, Employer’s Supplemental Tax Guide, Publication 1779, Independent Contractor or EmployeePDF and Independent Contractor (Self-Employed) or Employee? If you want the IRS to determine if a specific individual is an independent contractor or an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. For information on eligibility for a voluntary program to reclassify your workers https://www.bookstime.com/ as employees with partial relief from federal employment taxes, see Voluntary Classification Settlement Program (VCSP) Frequently Asked Questions. For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship.

Independent contractors vs. employees: The risks

Whether the relationship is one of employer-employee will depend on several factors. These include how much supervision, direction, and control you have over the services. Although these differences are quite clear, there are many situations that can become grey areas between the requirements for either an employee-employer relationship and those of an independent contractor.

• Litigation attorney with a broad range of experience (19 years) in civil and commercial litigation.
• The company also requires the owner-operator to meet certain contractually agreed-upon delivery deadlines, and her contract includes agreed-upon incentives for meeting, and penalties for missing, the deadlines.
• Since the introduction of virtual marketplace companies (VMC’s) like Uber, there has been some confusion about what is means to be an independent contractor vs. an employee.
• They are in business for themselves, offering their services to the general public.
• Now that we’ve looked at the differences between an independent contractor vs. employee, let’s take a look at the pros and cons of each form of employment to help you understand which would work best for your small business.