FAQs

What is the Difference Between an Independent Contractor and an Employee?

Employees receive certain benefits from their employers and are protected by certain federal and state labor, anti-discrimination and wage and hours laws that independent contractors are not entitled to. If you are an employee, your employer generally will:

  • Withhold income taxes from your paychecks
  • Withhold and pay Social Security taxes from your paychecks
  • Withhold and pay Medicare taxes from your paychecks
  • Pay unemployment tax

Employers also may offer other benefits to employees, including retirement savings plans, pensions, health insurance, disability insurance, stock options and paid time off, for example.

Independent contractors, on the other hand, are required to withhold and pay their own income taxes and self-employment taxes, which includes Social Security and Medicare taxes. Additionally, independent contractors are required to make quarterly estimated tax payments to the Internal Revenue Service (IRS) based on the amount of tax they will owe to the federal government at the end of the tax year.

It is not always clear whether an individual is an employee or an independent contractor. For employers, there may be an advantage for classifying someone as an independent contractor rather than an employee. Not only do they not have to provide costly benefits to independent contractors and pay unemployment taxes for them, but they also do not have to pay independent contractors overtime pay or reimburse their business expenses.

While the federal government and state governments use a number of tests to determine whether an individual is an employee or an independent contractor, the key question is the extent of the right of the employer to direct and control the work of the individual. Some of the factors that may be considered in making this determination include:

  • The skills required to complete the job
  • The form of payment - is the individual paid hourly or by project
  • Length of time of the relationship between the individual and the employer
  • Who provides the supplies to complete the work - office supplies, work space, computer
  • Is the work part of the employer's normal business
  • Does the individual receive benefits from the employer
  • Did the employer provide training to the individual
  • Does the employer prevent the individual from hiring assistants or other workers

In determining whether the individual is an employee or not, courts will look to the total circumstances of the relationship. The mere existence of a written contract stating the individual has been retained as an independent contractor alone is insufficient evidence of the nature of the employment relationship. The written contract can act as evidence of the parties' intent, but other factors will also be considered. Likewise, just because the employer does not make withholdings for taxes from the worker's paycheck does not prove the worker is an independent contractor.

Employers who wrongly categorize a worker as an independent contractor when he or she is in fact an employee can face stiff penalties from the IRS, including paying back all of the required withholdings for the employee, even if the employee has already paid them. Employers also may be open to lawsuits brought against them by the employees they wrongly categorized for unpaid benefits, overtime pay, worker's compensation, disability and more.

If you have concerns over the status of your employment relationship, contact an experienced employment law attorney today. He or she can review the facts of your situation and help you determine the best way to proceed in your matter under applicable state and federal laws.

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