What is the difference between an employee and an independent contractor?
While both classifications are found within employment, both are treated differently in terms of how each works and how each is viewed in terms of employer’s tax responsibilities.
Employee—an employee works for a company, whether part time or full time.
Independent Contractor---an independent contractor is someone who is hired to handle a specific task for a specific period of time. Furthermore, an independent contractor is not employed by the employer, but rather, is self-employed. Being self-employed means that the independent contractor is responsible for his or her employment taxes rather than the employer. The consequences of mis-classifying an employee as an independent contractor are tax penalties imposed by the IRS and possibly your state revenue office.
Here are some of the factors that the IRS looks at to determine whether you are employing an employee or an independent contractor. The more control an employer can exert over an employee, the more likely the person will be considered an employee rather than an independent contractor. The more of these you can answer yes to as an employer, you have an employee and not an independent contractor, regardless of how you have characterized them.
1. What instructions are given? Determining when, where, or how to work? Determining what tools should be used?
2. How detailed are the instructions that the employer is giving?
3. Is there an evaluation system to determine how well the work is performed?
4. Is the worker being trained on how to perform the job? Is the training ongoing?
5. Did employer invest significantly in equipment that worker is using?
6. Does employer reimburse the worker’s expenses?
7. Is worker’s opportunity for profits or loss limited or prohibited?
8. Does employer prohibit worker from offering services to the marketplace?
9. Does the employer pay the worker a guaranteed regular wage?
10. Is there a written contract that characterizes the nature of the worker’s employment?
11. Does the employer provide the worker benefits such as insurance, pension plans, vacation pay, or sick pay?
12. Does the relationship continue indefinitely?
13. Are the services provided by the worker key activities?
There is no one question that is more important than the other, but it is taking a view in totality that will indicate whether a worker is an employee or an independent contractor.
Remember the only question that goes unanswered is the one that never gets asked!