What’s the Difference? Independent Contractor vs. Employee

As a business owner, you probably want to do it all on your own. But it won’t take you long to realize that it’s simply not feasible – or smart. That’s when you bring in help. And that’s when you have another dilemma. Should you hire a contractor or an employee? And what’s the difference anyway? We’ll evaluate that in this week’s blog – and explain why knowing the distinction is crucial in order to avoid potentially stiff tax penalties.

The IRS says that the number one factor to determine the difference between an independent contractor and an employee is the amount of control you have over the individual – including when and how the work is completed for a specified duration. If you have that control, then the individual is most likely an employee. However, if your control is limited to deadlines and basic final product expectations, with no real control over the ‘how’ of the actual execution, the individual is likely an independent contractor.

Some other things to consider relate to your financial and compensation agreement with the individual. Do you reimburse expenses? Train them? Supply tools, supplies or software? How about a pension plan or health insurance? The individual again is likely to be classified as an employee.

Though the classifications seem straight forward, there’s no shame in having questions, as confusion does arise. But it’s important to ask, rather than find out the hard way. Why? According to the IRS, misclassifying an employee – as an independent contractor instead of an employee, for example – can lead to some heavy penalties, including past employment payroll taxes, including Medicare, Social Security, as well as other fees for not paying the taxes from the start.

In addition, independent contractors are not covered by federal overtime law provisions, and therefore, are not entitled to overtime pay. Should employers unintentionally or intentionally make this misclassification, when the worker fails to meet the requirements of an independent contractor, they are considered an employee and may be entitled to overtime pay when working more than 40 hours a week.

Starting to see how important it is to know the difference? If you have questions, we’re here to help. As HR experts with years of experience, we’ve seen it all. Call ELEVA Solutions today at 305-232-0832!