If you own a business, identifying those doing work for you as employees vs. independent contractors is important to government compliance.
Despite such an important classification, many employers do not know what distinguishes one from the other.
Independent contractor vs. employee?
As an employer, your main concern lies in compliance. If someone is an employee of your business, you must withhold and pay employer federal and state income taxes, Social Security and Medicare taxes and unemployment tax on the wages paid to an employee. If the worker is an independent contractor, you generally do not have to comply with any of these regulations.
So how do you know if you are working with an employee or an independent contractor?
20 characteristics of an independent contractor and how they differ from those of an employee:
An independent contractor is not required to comply with instructions about when, where and how the work is to be done, while an employee must comply.
An independent contractor does not need to be provided with training to enable them to perform a job in a particular method or manner, while an employee often requires a training process.
An independent contractor’s services are not integrated into your business operation in the same manner as an employee’s services.
An independent contractor is not required to render its own services personally, unlike an employee.
An independent contractor has the capability to hire, supervise, or pay assistants to help in performing the services under contract, while an employee often requires approval from his or her supervisor.
An independent contractor does not usually maintain a continuing relationship with the business/individual that hired them, while an employee continues to provide services.
An independent contractor sets its own hours of work, while an employee’s hours are set by a supervisor.
An independent contractor is not required to devote its full time to the person or company for which it performs services, while an employee usually provides services exclusively for the person or company who employs them.
An independent contractor does not perform the work at their client’s place of business, while an employee often works exclusively at their employer’s location.
An independent contractor directs the order or sequence in which it works, while an employee’s work sequence is somewhat directed by a supervisor.
An independent contractor is not required to provide regular written or oral reports to its clients, while an employee reports regularly to a direct supervisor.
An independent contractor is often compensated by fixed price, not-to-exceed, and/or milestone payments, while an employee is often compensated with a salary, hourly wages, and/or commissions.
An independent contractor is not reimbursed for business/traveling expenses, while an employee often is compensated for such expenses.
An independent contractor furnishes tools and materials used in providing services, while an employee has these provided by the employer.
An independent contractor has significant investment in the facilities that are used to perform services, while employee has little or no investment in the company’s facilities.
An independent contractor can realize both a profit and a loss from your work because they must assume risk based on client satisfaction. An employee rarely assumes the risk for the work.
An independent contractor can you work for a number of firms at the same time, while an employee typically works for one firm.
An independent contractor makes its services available to the public via business cards, stationery, invoices and a business listing in the phone book. An employee provides services for one employer.
An independent contractor can only be dismissed and withheld payment for nonperformance of contract specifications. An employee can be dismissed for a number of reasons.
An independent contractor can’t terminate its relationship with a client without incurring a liability for failure to complete a job. An employee can usually terminate a relationship with an employer and still receive compensation for the amount of work that they did.
For more information on an employee vs. independent contractor, visit the IRS website.
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