Employees vs Contractors: How to Tell the Difference
There are employers and employees, and then there are independent contractors. Employees and independent contractors might work next to each other on the same project, but there are critical legal status distinctions between being an employee as opposed to an independent contractor. The distinction affects where a person might receive benefits from, who withholds income taxes, where services might be performed and liability if an employee or independent contractor is injured at work.
The IRS ultimately makes the determination about whether you can consider someone an employee or a contractor, and the distinctions are not always incredibly straightforward. Here are a few possible differences between employees and independent contractors that small business owners will want to take note of.
Most employees receive benefits like health, medical and disability insurance. Their benefits might even include vacation pay and a retirement plan. The independent contractor must pay for his or her own health or disability insurance and retirement plan. Independent contractors receive no paid vacations.
Employees work under the direction and control of an employer. They have set working days and hours, and there are procedures established by the employer as to how they’re to do their work, as illustrated by this infographic. An independent contractor might perform a significant portion of their job at home or in an office. He or she might work through a weekend and take Tuesday and Wednesday off. It all depends on the task at hand. So long as deadlines are met, and quality standards are met, an independent contractor’s client has minimal direction or control as to how or when day to day tasks are performed.
The general rule is that if an employee is injured during the scope of their employment by an anticipated risk of that employment, he or she is eligible workers’ compensation benefits through their employer. An independent contractor wouldn’t be eligible for such compensation unless he or she paid for workers’ compensation insurance.
When small business owners hire somebody to work for their company, it’s critical that both parties know the capacity in which the person is hired or retained. Although they’re required to work within a client’s parameters, independent contractors are their own bosses. They might bring in their own employees to complete a job, but the entity that the job is being performed for can’t fire those employees. There’s no steady stream of income for the independent contractor, but there are times that when it rains, it pours profits. On the other hand, an employee relinquishes independence and control in return for a steady paycheck, benefits and job security.