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Whats the Difference Between an Independent Contractor and an Employee? The Administration for Children and Families

independent contractor vs employee

Many of these take the form of class action lawsuits in which plaintiffs’ lawyers represent tens, hundreds, or even thousands of similarly situated workers. The plaintiffs in these cases seek payment for unpaid wages or employee benefits, such as minimum wages, independent contractor overtime pay, sick leave, health benefits, and vacation pay. Because of the issues that can arise around whether a worker is an employee or a contractor, some skittish employers won’t hire contractors who use their social security numbers as taxpayer IDs.

How Do You Pay an Independent Contractor?

You pay an independent contractor just like you would pay any freelancer either by the hour, by the project, or by a flat fee. You can pay an independent contractor by check, Venmo, PayPal, or cash.

There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. The important thing is to look at the entire relationship of the worker to the business.

Definition of Employee

The On-Demand economy has been growing rapidly in recent years, opening the door to a relatively new category of work, such as independent contractors. Companies like Uber, Lyft, and Handy are the main leverages of this type of service. On-demand workers are independent contractors who provide services to customers via an online platform or app. Another misconception is that ICs do not receive any employee benefits. While it is true that independent contractors are not entitled to vacation days or health insurance, they may be eligible for certain tax deductions and credits. As we stated before, the first thing you should know is that an independent contractor is not entitled to the same labor and employment protections as employees.

When this happens, big problems arise for the company despite any good intentions on their part or on the part of the contractor. Independents may have their own employees, subcontractors, or partner consultants who help them to complete work tasks. During initial discussions, ask the independent contractor you are engaging if they utilize additional work resources. If they do, this should be outlined in your contract along with any necessary details. Remember, if independents do engage extra resources, they alone are responsible for the tax responsibilities, and filing and reporting requirements for these workers. Remember, because independent contractors are running their own business, they need to sell and market their services.

See Why 730,000+ Businesses Use Paychex

It has never been easier to get the right advice at the right time. Treating the contractor as an employee is, perhaps, the most common place where employers trip up and transform the contract relationship into an employee relationship. The problem is, of course, that employers can come to over rely on independent contractors and, over time, begin to treat them as employees.

Hiring someone to complete that small project you’ve needed done for ages? If they’re working as an independent contractor, rather than as an employee, make sure to protect your business with an independent contractor agreement. In an attempt to interpret provisions of the Fair Labor Standards Act and discern between employee and independent contractor status, some courts and federal agencies have come up with the “economic realities test.”

Independent contractors vs. employees: The risks

Department of Labor issued its final rule clarifying who an independent contractor is versus an employee. Earlier, the National Labor Relations Board eliminated three of its factors that clarified the definition of an independent contractor. Meanwhile, the IRS held fast to its two key points with nine clarifying aspects. When you form an LLC, you likely need to receive an income from the business. Here are several options available for setting regular payments to yourself. If an employer does not have authority over how a party accomplishes his or her work but simply give requests an outline, the relationship between the parties is that of hiring party/independent contractor.

  • If you make a mistake or underperform, you’re also more likely to be placed on an improvement plan rather than abandoned and never hired again.
  • You have a higher degree of control over all aspects of your finances.
  • That also comes with greater compensation, like healthcare or retirement plan contributions.
  • In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
  • Think of your relationship with an independent contractor as a business-to-business relationship.

The independent contractor is responsible for paying his own income taxes, Social Security and Medicare taxes. If the person is determined to be an employee but you have treated him or her as an independent contractor, it can be a costly mistake for your business. Unfortunately, if the company gets the classification of independent contractors wrong, bad things can happen. The company could be liable for employment taxes, back wages , unemployment insurance claims, workers’ compensation claims, violations of the FMLA, claims involving benefits, and more. The Department of Labor regularly audits companies for compliance and an aggrieved contractor can file a lawsuit, including one seeking class-action status.


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