What Is the Difference between Employees and Independent Contractors

The difference between an independent contractor and an employee is an important issue that employers need to understand. Aside from legal headaches and potential issues with the IRS, this can actually have a huge impact on tax liability and other obligations. Typically, real estate agents work independently, but within a larger network or agency that helps process commissions in exchange for a sale. In most cases, the self-employed earn more in a given year than employees in a comparable position. However, their professional lives are very different and entrepreneurs have to cover many expenses that employees do not have to take into account to easily explain this income gap. It is difficult to determine who earns the most based on the type of job, and so it is more reliable to look at the industry. In this guide, we`ll show you how to tell the difference between employees and independent contractors – and what can happen if you don`t. If you are an independent contractor with questions about your status, contact the Ministry of Labour`s disclaimer page. As we have already mentioned, employees receive an hourly, weekly or monthly salary.

You may also receive commissions and, in some circumstances, overtime. Employees are taxed on this income and receive a Form W-2 showing their annual income. The employer is responsible for deducting federal and state taxes, as well as Social Security and Medicare taxes, from their income. The employer is also responsible for paying half of the social security and health insurance taxes. Freelancers may have their own employees, contractors or consultant partners to help them with their work tasks. During initial interviews, ask the independent contractor you hire if they are using additional work resources. If this is the case, this should be described in your contract with all the necessary details. Keep in mind that when freelancers deploy additional resources, they are solely responsible for the tax responsibilities as well as the reporting and reporting obligations of these workers.

It`s also important for employers to learn about their state`s laws about independent contractors, as they can easily deviate from federal regulations. This will be important for national and local taxes, as well as for occupational safety rules. Who is considered an employee and who is considered an independent contractor ultimately depends on the law, especially tax law. For employers, it can sometimes be difficult to determine whether the person they`ve hired is an employee or an independent contractor, with the U.S. Department of Labor claiming that nearly 30 percent of employers rank employees poorly. However, it is extremely important for employers to know exactly this, as it can result in the payment of tax arrears, fines, and employee refunds. For employees, the exact definition of their type of work determines whether they are employees protected by the Fair Labour Standards Act or independent contractors who are not protected by such protection. In addition, employees also cannot be an independent contractor for their employer. As a rule, their income is not subject to acquisition tax. However, your income as an employee may be subject to FICA (Social Security Tax and Medicare) and income tax withholding, which the employer typically deducts during payroll. The employer provides work-related tools and necessary equipment.

While employees can fill out time cards, they do not submit monthly invoices for payment. While these are very general definitions, there are some relevant differences between employees and independent contractors. Instead of working for a specific salary, independent contractors submit invoices for their work. The terms of payment and payment must be discussed during the first contractual negotiations. Key Findings: Independent contractors are not employed by the company with which they contract. They are independent as long as they provide the agreed service or product. Employees are on the company`s payroll for a longer period of time and are usually not hired for a specific project. While employees typically receive educational oversight from a manager, a client cannot determine how an independent contractor operates. For example, independent companies usually provide all the tools or equipment they need.

Unlimited employment is the usual form of employment, with the exception of Montana. This means that employees can dismiss or be fired at any time as long as it is legal. While the self-employed come from virtually every sector of the economy and work in virtually every sector of the economy, most show a high degree of specialization in their industry. In fact, the majority of freelancers report that they receive work orders because they offer a special skill that requires certification, special training or training. Workers are strongly protected by labour legislation and, in some cases, by trade unions. Independent contractors are not protected by most of these laws and can be injured in employment, but without recourse; This can lead to costly and lengthy lawsuits. Partnering with an experienced company can help you navigate complex classification processes and procedures. MBO Partners has extensive experience in helping companies hire independent talent in a compliant manner. Contact us today to learn more. The existence of a particular contract may indicate an independent contractor, but this factor alone is not determinative. If the employee is entitled to benefits, this would indicate an employment relationship.

Another factor would be the type of work the person does; If it is directly related to the basic work of the company, it is probably an employee. For example, a cleaner would not do “corporate work” if he worked for a bank. Independent contractors also typically have what the IRS calls a “significant investment” in their business — whether it`s equipment, training, and licensing — and aren`t compensated for expenses like fuel, tools, and office supplies. While these differences are quite clear, there are many situations that can become gray areas between the requirements of an employee-employer relationship and those of an independent contractor. Key takeaways: Freelance copywriters, graphic designers, real estate agents, and some IT professionals are examples of independent contractors. The common denominator is that they have autonomy, even if they can work with a larger network, team or agency. Typical features of an independent contractor are: Suppose you run a coffee shop and pay a graphic designer a lump sum to create new menus and business cards for your coffee shop over a period of time. In this case, you will most likely hire an independent contractor. But there are very important legal differences between a contractor and an employee. To make it easier to distinguish between employees and independent contractors, the IRS has established three general criteria: You must send each independent contractor an annual form 1099-NEC (starting in 2020) if you paid $600 or more to that person during the year. It is easy to understand why, from a financial point of view, companies prefer employees to be classified as independent contractors: the company would not have to withhold income tax and would not be liable for 50% of FICA taxes and 100% of FUTA taxes for the employee. The reduction in service spending is also considerable.

Just to confuse things, there is another possible status for employees called a statutory (or non-employee) employee. A statutory employee is a cross between an employee and an independent contractor; They are treated as employees outside the business, but they are treated as employees for labour tax purposes and as an independent contractor for income tax purposes. That`s what California regulators asked Uber for in 2015 when the ride-sharing giant was sued for “misclassifying” a driver as an independent contractor. This can include professions such as freelance software developers, copywriters, and also professionals working under a consulting contract or an independent contractor contract. .