Independent Contractor vs. Employee… What Is The Difference?
This topic is not only important in how you pay the person that you’re hiring but especially important during tax season because it makes a difference in how the worker will pay taxes.
Employees are paid a salary or an hourly wage with possible overtime. They are taxed on their income when you, the employer, withhold federal and state income taxes as well as FICA taxes from their paychecks.
For an independent contractor, on the other hand, you do NOT withhold federal or state taxes or FICA from the amount you pay them. The independent contractor will pay their own income taxes, also known as self-employment taxes.
Distinguishing Employee and Independent Contractor
The IRS defines an employee as an individual hired by a business to perform work at the instruction of the employer (business owner). The IRS defines an independent contractor as an independent business owner who runs their own business and performs services for another business.
Still confused?
To better distinguish between the two, the IRS provides guidelines in the form of 3 categories:
- Behavioral Control: If the hiring business owner trains the worker as to when, where to work, what equipment to use or where to buy supplies, this may indicate that the worker has little control. Lack of control would mean that he or she is an employee. If the worker sets his own hours, decides where to work and how the work will be done with no training or instruction from the hiring business then this indicates that the worker is probably an independent contractor.
- Financial Control: If the hiring business controls when the work is paid, how they are paid and also reimburses the worker, then that indicates an employer-employee relationship. If the hiring business also decides whether the worker may work for others at the same time, this also indicates an employer-employee relationship.
- Type of Relationship: There may be a contract in place that determines whether the worker is an employee or independent contractor, but this isn’t enough to define the relationship. If a worker gets employee type benefits (sick pay, health insurance), this normally indicates that the worker is an employee. Also if the worker is only employed for a short term on a specific project, this may indicate that he or she is an independent contractor.
Still Unsure?
The IRS normally errs on the side of defining a worker as an Employee, but if you are unsure whether to classify a worker as an independent contractor or employee, you can file a Form SS-8 to request a determination.
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