For many employers the line between employees and independent contractors can get blurry. Are there clear-cut rules to delineate? Does the employer get to choose? Does the employee have a say in the matter? Financially, what is the difference? Who makes the rules?
What is an Employee? An employee is a person hired onto the staff to perform a certain function or functions. Employees are paid based a previously agreed upon rate, usually hourly or annual salary, and payroll taxes are generally withheld from their net pay and paid by the employer directly to state and federal tax agencies. Employers are also responsible to pay certain payroll taxes, in addition to those withheld from the employee’s paycheck. Employees also have access to employment benefits as laid out by the employer. Most employment benefits, if offered are required to be offered to all employees uniformly.
An employee typically uses tools and materials provided by the employer to do their job. Employers have authority over the methods and procedures used by an employee to complete the work and the employee’s schedule is dictated by the employer.
Follow this link to learn how the IRS defines employee.
What is an Independent Contractor? An independent contractor is also hired to perform a certain function or functions, however with less oversight and dictation from the employer. Contractors may be paid hourly but may also be paid weekly, monthly or by the job. Payroll taxes are typically not withheld for independent contractors and the employer is not responsible to pay any payroll taxes on behalf of themselves or the contractor. Independent contractors are generally not entitled to those benefits afforded to employees, such as health care, paid leave, 401k, etc.
An independent contractor will often bring their own tools or materials to the job or do the job remotely or off site. The employer has authority only over the final work product and not the methods and procedures used to complete the work. An independent contractor’s schedule is not dictated by the employer, though the employer may certainly give deadlines.
Independent contractors are often incorporated. This is a wise step for an independent contractor as it can offer certain legal and tax protections.
A major difference for the independent contractor is that at the end of the year, he/she is responsible to pay all the payroll taxes for both the employee and the employer, this is called self-employment tax.
Follow this link to learn how the IRS defines independent contractor.
How to Choose As evident above, it’s not really about choice, it’s about determining which role the person fits. Employees are usually more expensive than independent contractors, however you have more control over an employee’s schedule and way they do their work. While independent contractors may seem like the less costly way to go, an employer can face stiff penalties if it’s found that an independent contractor should have been an employee. In a tough call, you can consult your HR department or an attorney or you can err on the side of caution and make the person an employee. There are no penalties for paying an independent contractor as an employee. In Summary The IRS provides tools to help with these matters but it is acknowledged to be a gray area. The IRS is the authority on this matter. They have guidelines to help an employer determine whether and employee is an employee or an independent contractor, which you can find here, IRS.
When in doubt, the safer solution is to make the person an employee.
I hope this article has been helpful to you in making the right decisions for your business.
If you have any questions about bookkeeping or are considering hiring a bookkeeper for your business, please feel free to contact us at info@peggysbookkeeping.com.
About the Author
I have been doing bookkeeping for about 20 years and concurrently held a position as the head of HR for a small management firm for 14 of those years. During my years in bookkeeping and HR I’ve seen audits of all kinds and the employment audit was one of the uglier ones.
Currently, I am an owner of Peggy’s Bookkeeping Service with my partner and mother, Peggy. Peggy’s Bookkeeping is a small, family-owned bookkeeping service based in Clearwater, FL. You can visit our website at www.peggysbookkeeping.com.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.