A business may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company withholds income tax, Social Security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes. Employment and labor laws also do not apply to independent contractors. For additional information follow this link:https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation
To determine whether a person is an employee or an independent contractor, the company weighs factors to identify the degree of control it has in the relationship with the person. If the company does not get this right there could be serious consequences with the IRS.
- Does the company control or have the right to control what the worker does and how the worker does the job?
- Does the company control the business aspects of the worker’s job? These include arrangements like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.
- Is there a written contract or employee benefits such as a pension plan, insurance, or vacation pay?
- Will the relationship continue and is the work a key aspect of the business?
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Employee |
Contractor |
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Employees are covered by a number A potential employee completes an Provides name, address, Social Security Reports all money paid to the employee An employee can be discharged at any Employees can quit their jobs at any
An employee hires, supervises and pays
Employees comply with instructions
Employees are trained to perform services Services of an employee are merged into
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Are not covered by employment and labor laws A potential contractor normally interacts with the person or department that wants a certain service or task completed. A potential contractor might complete a proposal. The contractor enters into a contract, including a Statement f Work with legal or procurement section of the business. Provides name, address, Taxpayer Identification Number, and certification about back up withholding on a W-9 Reports payments of $600 or more in a Calendar year Form 1099 Contractors cannot be fired as long as the product results meet contract specifications Contractors agree to complete a specific job and are responsible for satisfactory completion; or they are legally obligated to make good for any failure Contractors hire, supervise and pay other workers as the result of a contract. A contractor agrees to provide materials and labor and is responsible for the results. Contractors set their own hours and do the job in their own way. Contractors use their own methods and receive no training from the purchaser of their services. The success and continuation of the business aren’t dependent on the services provided by the contractor. |
