Employees versus Independent Contractors
What Is an Independent Contractor?
Independent contractors work for themselves and earn their living from their own businesses rather than relying on another to provide them a salary. Independent contractors are also known as entrepreneurs, consultants, freelance workers, or self-employed. Examples include, but are not limited to: 1) professionals who offer their services or advice to the public, such as attorneys, real estate agents or accountants, and 2) occupations which grant a high degree of autonomy to the worker, such as writers or barbers.
What Are the Differences between Being an Employee and an Independent Contractor?
There are many federal and state laws that cover employees. Two of the most important are the Internal Revenue Code (IRC) and the Fair Labor Standards Act (FLSA). The employer must follow these laws by paying Social Security and Medicare, withholding income taxes, paying for unemployment insurance, paying at least the minimum wage and overtime wages.
There are no such requirements for independent contractors. The independent contractor usually will earn higher wages, because the employer does not withhold income tax nor does the employer have to pay for all of the benefits. An independent contractor controls the payment of taxes. Independent contractors are largely responsible for their own actions; liability for any bad conduct is limited to the independent contractor and will not typically extend to the employer. In contrast, an employer can be held responsible for the actions of an employee. If an employer treats someone as an independent contractor when they should be treated as an employee, or vice versa, that employer risks substantial civil, and possibly criminal, penalties for violating labor laws. If you are a business owner, whether large or small, you should make sure you are classifying your employees correctly.
Am I an Employee or an Independent Contractor?
The most important issue that is considered in differentiating employees and independent contractors is that of right to control. If the employer controls not only what is done, but also how it is to be done, then the worker is deemed to be an employee and not an independent contractor. If the worker is more independent, it is more likely that they will be considered an independent contractor.
Some states are also starting to examine the relationship between the worker and the employer to determine whenever a worker is an independent contractor or employee. Factors to consider:
- Instruction given to worker
- Training provided to worker
- Set hours of work
- Compensation by the hour, week or month, or by task
- Business/travel expenses paid by company
- Full-time work at one company, or working for several companies at a time
- How much skill the work requires
- Whenever the parties involved believe they are employees or independent contractors
- Length of time working with or for the company
- Importance of the work to the company
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Last Modified: 03-27-2012 11:01 AM PDT
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