Understanding the Distinction: Contractor vs. Employee
In the ever-evolving world of work, understanding the distinction between a contractor vs. an employee is crucial. Each position has its’ own set of characteristics, from payment structures to autonomy and onboarding processes. Let’s delve into the key differences that set these two types of workers apart!
Key Indicators
Payment, Taxation, and Benefits
One of the biggest differences between the two is how contractors and employees are paid and taxed. Employees are on a company’s payroll, receiving a regular wage or salary, with the organization handling tax deductions and often offering various benefits like health insurance, paid vacations, and retirement plans. In contrast, contractors receive an agreed-upon wage for their services but are responsible for managing their own taxes and benefits.
Autonomy
Contractors on a whole are more independent with their work. While employees are typically directed by their employer in specific tasks, contractors are handed a project and allowed to execute it as they see fit. This autonomy gives them a level of flexibility and control over their work that employees do not have.
Onboarding and Training
Onboarding processes differ significantly for employees and contractors. Contractors typically receive only essential information required to complete their specific task, while employees will do more extensive onboarding to learn things like team dynamics, company culture, and company objectives.
Hiring Goals
Employers have distinct hiring goals for employees and contractors. Employees are sought after for their long-term loyalty and commitment to the organization’s success. In contrast, contractors are hired for their niche expertise, often to fulfill short-term objectives.
Flexibility
The flexibility of work arrangements differs as well. Employees are bound by the rules and obligations of a single company, often receiving paid time off. Contractors, on the other hand, can choose to work for multiple organizations simultaneously, using their time as they see fit.
Distinguishing Independent Contractors from Employees
The IRS considers around 20 factors when classifying employees vs. contractors. However, these are the main three common law rules that you can start with.
- Behavioral Control: Does the company dictate the worker’s tasks and methods?
- Financial Control: Is the business aspect, like payment, expenses, and tools, controlled by the payer?
- Type of Relationship: Are there contract or employee benefits, and is the work integral to the business?
However, it is important to note that no single factor defines the worker’s status, and it may vary between situations. The key is assessing the overall relationship and the extent of control. This will help you make an informed decision on how to classify your worker.
Consequences for Misclassification of Employees
If you classify an employee as an independent contractor and you have no legitimate reason for doing so, then you may be held liable for employment taxes for that worker. You can find more helpful information in the internal revenue code section 3509.
Determining the difference between a contractor and an employee is important for any business! Making a correct classification not only affects your taxes, but also how efficiently you are achieving work goals and projects. Here at LEM Business Solutions, we understand the importance of ensuring your business has the right fit for what you need to accomplish. Check out all the services we provide!