Employee vs Independent Contractor

What is the difference between an employee and an independent contractor?

There are some common distinctions, known as the common law test, between employees and independent contractors:

Employees:

Independent Contractors:

· Is required to comply with the employer’s instructions on when, where, and how to work

· Sets their own hours and sequence of work

· Is hired by the employer and works exclusively for that employer

· Is self-employed, services are available to the public, and can work for multiple employers

· Is subject to dismissal or can quit without liability

· Contracts dictate how the relationship is severed

· A continuing relationship exists between the worker and the employer

· Works by the job

· Training, tools, and materials are provided by the employer

· Provides own training, tools, and materials

· Personally completes work

· May employ assistants

· Reimbursed for expenses and participates in company’s benefits programs

· Paid by the job, which may result in profit or loss for the worker

· Works under the company name

· Services are performed under the worker’s name


By utilizing the common law test, employers consider three categories: behavioral control, financial control, and the relationship of the parties involved.

Behavioral control refers to the right to control the means by which the worker performs the task at hand. This type of control also includes instructions and training provided by the employer.

Financial control is best reviewed under the context of whether the worker has the opportunity to make a profit or suffer a loss from the work being performed. A worker may be considered an independent contractor if he or she has made a significant financial investment in the job, will not be reimbursed for business expenses, or has made his or her services to the general public. Employers should also consider whether workers are paid per the job or on a regular basis.

The relationship between the parties is also a determining factor when evaluating if a worker is an independent contractor or an employee. If a W2 was filed for the worker or if the worker receives benefits under an employer’s benefit plan, the worker should be classified as an employee.

A couple of things that do not impact how a worker is classified:

The amount of hours or number of days do not impact a worker’s classification. Tax laws apply to employees regardless or length of service or position within the company.

 

If you are unsure of a worker’s classification, employers are able to obtain a definitive IRS ruling as to a worker’s status by completing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The form contains a series of questions covering the three different categories. To avoid any penalties or interest assessments, employers should consider the worker as an employee and all appropriate taxes and wages should be reported while waiting for the IRS’s determination. The form can be found here: https://www.irs.gov/pub/irs-pdf/fss8.pdf

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