Posted on July 28, 2022
Before deciding whether to hire a full-time employee or use independent contractors, you need to have a clear understanding of the differences.
An independent contractor, as defined by Law.com, is an individual or business who performs services for another person or entity with a contracted understanding between the parties. With all of the terms spelled out – such as duties, pay, and the amount and type of work – the contracts govern what the work is more than how the work is executed. An independent contractor is distinct from an employee who works regularly for a single employer.
Independent contractors are not employees of the business or entity they are providing services for. However, the employer is paying the independent contractor for their work. Independent contractors are self-employed (also known as a “business for self”), which means they can operate and work for several clients at a time. Companies often use independent contractors for services to avoid bringing employees on staff for short-term needs.
Key takeaway: Independent contractors are typically project-based workers who have autonomy in how they complete the work as long as they complete it as agreed.
Both the Department of Labor (DOL) and the Internal Revenue Service (IRS) maintain important definitions and rules for independent contractor status. The IRS’s general rule is that an individual is considered an independent contractor if the payer of the services can only control the result of the body of work, not necessarily how it is completed. The independent contractor completes IRS Form W-9, and an employee completes the IRS W-4 tax form.
Independent contractors are self-employed; the money they make working as an independent contractor is subject to self-employment tax. They supply their own work tools and must submit invoices for payment.
Employees of a company perform services that can be controlled by an employer, including what works needs to be done and how it should be completed. This definition also applies to exempt employees, who have the autonomy to operate within their role as the employer sees fit, so long as the outcome is acceptable. What matters to the DOL is whether the employer has the legal right to control the details of how and when services are performed.
Further, employees cannot also be an independent contractor for their employer. Thus, their earnings are generally not subject to self-employment tax. However, their earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding, which the employer typically takes out during payroll processing. The employer provides work-related tools and the necessary gear. Although employees may fill out timecards, they do not submit monthly invoices for payment.
To deliver this messaging in a straightforward way, this chart from ComplyRight shows the stark differences between the independent contractor and employee classifications.
Misclassification of independent contractors can get employers in big trouble with the DOL and IRS. The IRS has strict definitions to determine whether a worker is an employee or an independent contractor. It is critical for your business to classify all your workers accurately. By misclassifying a worker, you could be subject to some large penalties and fines.
To help avoid this error, the IRS has developed the IRS 20 Factor Test – Independent Contractor or Employee? You can check your needs and reasoning for wanting an independent contractor with this 20-point test to determine whether you should hire an independent contractor or an employee. This test is heavily used to determine when and how the IRS pursues employers in the U.S. for misclassifying workers.
These are the 20 factors used to evaluate the right to control and the validity of independent contractor classifications:
Key takeaway: Independent contractors are not employed by the company they contract with; they are independent as long as they provide the service or product agreed to. Employees are longer-term, on the company’s payroll, and generally not hired for one specific project.
There are many fairly routine examples of independent contracting functions or roles within business today.
Freelance writers generally work as independent contractors, writing articles and then selling the articles to publications. Similarly, freelance graphic designers may create graphics for many companies’ one-off projects. Work product is outlined in an agreement and then executed in a way that the freelancer sees fit, and they are compensated per task they accomplish.
Typically, real estate agents work independently, but within a larger network or an agency that helps process the commissions in exchange for shepherding a sale.
Some IT professionals are independent contractors. This can be a tricky one, as many IT professionals are employees. If they are performing short-term or specific project work that has a completion timeline in place, they are typically operating within an independent contractor role.
Key takeaway: Freelance writers, graphic designers, real estate agents and some IT professionals are examples of independent contractors. The common thread is that they have autonomy even though they may operate with a larger network, team or agency.
When working with independent contractors, you can use several simple tactics to keep yourself out of hot water with the IRS and also ensure the work meets your needs.
It is important not to blur the lines between contractor and employee. Do not allow independent contractors to use company equipment that they should already have. For jobs like writing and graphic design, contractors generally do not work onsite.
Never allow a contractor to begin work on behalf of your company without a fully executed contract or agreement. This document is what outlines your relationship with the independent contractor, and it is essential to stick to its parameters throughout your relationship.
This is an all-too-common mistake the IRS finds employers making with independent contractors. If you need long-term work from the contractor, the DOL and the IRS will eventually wonder if you should have a regularly scheduled employee in that role.
Original post: https://www.businessnewsdaily.com/15853-independent-contractor-employee-differences.html