Independent Contractors versus Employees, Whats the Difference?

If you own or operate a business, oftentimes you find yourself needing to hire some help in order for your business to run smoothly and efficiently. The question that always arises when deciding who to hire is, do I need an independent contractor or an employee, and what is the difference?

Both employees and independent contractors perform services for the company, but the difference is whether the business can control what will be done and how it will be done. An employee for example is hired with the intent that the business has the right to control the details of how the employee’s services are performed. On the other hand, independent contractors are people in an independent trade, business, or profession in which they offer their services to the public. Some examples are graphic designers, consultants, web designers, social media support and virtual assistants.

Evidence of the degree of control and independence falls into three categories:

1. Behavioral: Does the company control or have the right to control how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? Such as, how they are paid, whether expenses are reimbursed or who provides the supplies.
3. Type of Relationship: Is there a written contract or employee benefits? I.e. insurance, pension plan or vacation pay. 

These three factors can help make the decision on whether a worker should be classified as an employee or independent contractor, but keep in mind there is no magic set or number that classifies the workers as one or the other, and the key is to look at the entire relationship and consider the extent of the right to control the worker. Once a decision is made, the company will want to make sure to document the factors used in coming up with the determination.

The decision of whether a worker is an employee or an independent contractor is also extremely important for the worker, particularly when it comes to filing their tax return. This is because for an employee the company withholds income, social security and medicare taxes from wages paid. For an independent contractor, the company does not withhold taxes. It is the responsibility of the independent contractor to determine if they need to make quarterly payments throughout the year to cover any potential tax due on their income.  Underpayment penalties and interest may be assessed if the tax is not paid in as the income is earned.  

Ask your MOD tax professional if you have any questions!