Understanding the difference between an employee and an independent contractor is vital. The difference might seem small at first, but confusing the classification can result in problems down the line. As a general definition, an employee works solely for your company. This means they're on your company payroll, you pull out federal employment taxes for them, you give them benefits, etc. A contract worker is independent and while you technically pay them for services rendered, taxes are not withheld and benefits are not given.
It might seem overwhelming to know where to look for an independent contractor, and if they fulfill your needs. Companies like Talentcrowd source these contractors to lessen the pressure on you. It might also seem daunting to figure out if the individual working for you qualifies as an employee or an independent contractor, especially when you consider criminal penalties that might incur from breaking the laws that dictate your relationship with those who work for you.
The consequences of improperly classifying your workers could be far-reaching. Consider the labor laws, taxes, and other eligibility requirements that protect both you and those who work for you. According to the IRS, there are three main categories to consider when classifying those that do work for your company: behavioral control, financial control, and type of relationship. This article will break down these categories into a checklist as you consider the status of your workers.
The behavior indicated here mostly regards when and where a worker completes their job, and the level of instruction given. The headings below address business aspects, like the materials an individual uses and where they get them: can the worker's job be done with their materials or are you providing them? Remember that an independent contractor is self-employed, and they're not beholden to your overall company goals. Yes, you pay them for what they do for you, but they may also be doing a similar service for another company.
Generally, more control and more instruction would indicate an employee, while more leeway would imply an independent contractor. One factor of your relationship as an employer to an employee or as an employer to a contractor is defined by your control over their work behavior. Consider the questions below as you determine how to classify your employees.
Do you Control Where and/or When the Individual Works?
If yes, the worker is an employee. Your corporate culture and rules state where this individual completes their job. Consider if they're dependent on you for direction whether they work at home, in an office, or from an alternate work location. Also, consider if you determine a schedule for them to work from. This would cover both part and full-time employment.
Otherwise, the flexibility would imply they are an independent contractor. One of the many differences between an independent contractor vs an employee lies in the flexibility of scheduling and location. Remember that an independent contractor often works for other companies on top of yours and are often their own boss. As an employer, you don't have that same control over their schedule that you would for an employee. However, you do set deadlines for contractors they must meet. These are generally set for the time required for the final product.
Do you Provide Materials for the Individual to Complete their Job?
If you do, it is likely this person is an employee. A common employee benefit includes not spending their own money on a computer or other necessities for completing their job. As an individual exclusively works for your company, you likely have some quality control for their process and their finished product. There may be some desire for similarity in what tools your employees use.
If not, chances are they're an independent contractor. While there are instances where a company has a "provide your own equipment" policy, a contractor applies this policy every time. Yes, this is an extra expense for them to fulfill, but that's their responsibility as a contractor. As mentioned, they're self-employed and might be working for multiple companies at the same time, so they aren't beholden to one employer for their technological purchases.
What Level of Instruction and Information has been Provided?
Information and employee onboarding through your human resources department would imply that they are employees. Employment would require time and training before starting at your company to know what's expected of them. Employees need to understand your company's culture and the ins and outs of their day. They might have potential for growth, or should be aware of the hierarchal structure present in your company.
On the other hand, instruction and information regarding a specific project without going into full onboarding would be appropriate for a contract worker. They wouldn't need as much time before starting the project as someone in need of a full onboarding process. They're not going to be there long-term and are with you for the express purpose of a specific project.
How Much Oversight is Provided During and After a Project?
If you're checking in often or if you've implemented specific and regular evaluations, regardless of the status of a project, this worker is probably an employee. Their progress and your evaluation of their work have larger implications within your company because they'll be around long-term.
The worker is a contractor if the evaluation is purely based on the end-product and there isn't as much checking-in during the process. They're often independent of your company's culture and larger picture, and more inspection would be inappropriate or unnecessary. As long as they're producing what you've asked, you as the employer don't need to check in as often.
This next section will address questions regarding reimbursements and wages paid. As an employer, you must determine the control you have over the economic impact on the individual. Consider travel costs and whether you're paying the difference.
Generally, consider how you are obligated to an employee, and that you might need to cover things like potential travel costs and regular wage payments. A contractor has a separate contract with you based on a specific project. One of the benefits of being an employee is that you, as their employer, take care of more aspects of their job.
Do you Reimburse the Person for Travel or Other Expenses?
Regularly providing reimbursements implies that the worker is an employee. Many companies provide gas or travel costs when someone has to go into the office on a regular basis. If they're attending a business trip or the job requires training for their position, this could be reimbursed as well.
If the manner in which someone completes their job is up to them, and no financial compensation is provided for travel, training, etc., this likely is a contract worker. Their independence gives them the flexibility to figure these factors out for themselves.
Could the Lack of Reimbursement Create a Financial Loss for the Worker?
When workers have to front the money for training or equipment to complete their job instead of receiving the compensation or guarantee of consistent income from an employer, they're likely independent contractors.
Otherwise, they are an employee. As an employer, you might have an investment in the growth of your employee. Paying for their training demonstrates that fact. They're hopefully going to be employed for an extended period and provide benefit to your company, so you want them to have the training necessary to complete that task.
Can the Person Look for Work in Places Other than your Company?
An employee often has certain limitations when looking for supplemental income. Many companies require their employees to work only for them. Allowing them to pursue other concurrent positions in the same field could breach confidentiality and competition clauses in their employment contracts.
On the other hand, a contract worker is free to seek employment in their field with whomever would like their help with completion of specific projects. They're not subject to company control and don't have to remain obliged to only one company.
Do you Pay the Person on a Regular Schedule?
An employee can receive an hourly wage or a salary, depending on the position and responsibility. If wages paid are regular and determined based on their time spent or other factors (like a salary or pay schedule,) then this is an employee.
An independent contractor would receive payments based on their project, likely a set income for the completed job. However, some contract workers could be paid hourly, like a lawyer for example.
Type of Relationship
The IRS considers the relationship between worker and employer to cover aspects of expenses, like written contracts, vacation pay and other benefits, and employment tax purposes. Financially and legally speaking, these types of items listed in the captions below might be of great concern as you consider the ramifications of breaking tax and labor laws. Not adhering to these laws could result in back taxes and other expenses.
As you read more about the employee checklist, think about the benefits you offer to your employees. You might already have parameters in place to determine what your employees receive. Part vs full-time employees could have different benefits, while an independent contractor has none.
Do you Pay the Employment Taxes for your Worker?
Even if you have a contract stating that a worker is self-employed, if you're paying their employment taxes, this would be considered a worker misclassification as they are actually an employee. Whether or not you pay taxes for your employee is a key aspect in considering if they are an employee versus an independent contractor. Part of the benefit of being an employee includes the company completing their payroll taxes.
Someone self-employed, or who is a contract worker, is required to pay their self-employment tax. Common law states that they're their own boss and are required to follow through on those taxes themselves. They need to know their taxpayer identification number, and how to discover what they owe to the IRS.
Do you Provide Benefits for your Worker?
Along with the payroll taxes mentioned above, providing health insurance, or other benefits like a pension plan or paid vacation means the worker is an employee. As an employer, you're putting the work into maintaining a good relationship with your employee. Yes, you pay their wages, but the extra step of providing benefits improves morale and company culture.
An independent contractor does not receive the same benefits, as they're expected to pay their taxes. They're in charge of figuring out their health insurance or other aspects that would generally be provided by an employer.
Is the Worker Hired Permanently?
This one may seem simple, but if you've hired someone to work long-term at your company, they're an employee. This can come with the promise of growth within the company or other employee benefits mentioned above.
Even if the worker is hired to perform a substantially similar position as an employee, if their entire relationship with you is dependent on a single project or is terminated when the work performed is completed, they are an independent contractor. They've specialized their abilities. They're there for you to hire to help out with your projects if you're in a pinch, or to fulfill your purposes without needing benefits.
Sometimes determining the difference between an independent contractor and an employee can be tricky, but with this checklist and help from the IRS, you can feel confident that you've appropriately designated employee status. You could also look for help and tips from companies like Talentcrowd, as they deal with contract workers.
Working with an independent contractor can make future tax periods easier when you only have to worry about their pay for services rendered, and not any further expenses. The employee checklist in this article can help you see the differences between your employee classifications, and can also prompt you to determine which workers best fit your company's needs.
Consider Talentcrowd for your contract worker needs. They provide top talent to help you reach your goals without worrying about taxes or providing benefits. These contract workers provide a valuable aid to your company's goals. Ensure that you're correctly classifying your workers with the employee checklist above to avoid painful legal and monetary consequences.
**Talentcrowd and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for advice based on its particular circumstances.**