Differences Between Independent Contractors and Employees
Deciding whether to hire an independent contractor or a regular employee is a big decision and not one to be taken lightly. There could be financial consequences if you hire someone as an independent contractor yet treat them like an employee. Do you know the differences?
There are definitive differences between contractors and employees, and you must consider what is best for your organization. While regular employees follow specific directives/rules, and methods of completing tasks set by the business owner, independent contractors work without supervision, and are free to use their own equipment and processes to deliver results.
There are 3 bases to determine the difference between an independent contractor and a regular employee: Behavioral, Financial and Type of Relationship.
BEHAVIORAL
Behavioral control determines whether the business or employer has the right to control or give directives on how work should be completed.
A person is considered an employee if the employer/business has the right to direct and control the worker in terms of:
- Working hours
- Type and degree of instructions given
- Evaluation systems
- Training
A person is considered an independent contractor if:
- The individual has their own set of methods for completing tasks
- Evaluation is measured only on the end result
- Little to no training is provided
FINANCIAL
Financial control is associated with the reality of whether the business has control over certain economic aspects of the staff’s job.
A staff member is a regular employee if there is:
- Company owned equipment that’s being used to complete the tasks
- Less opportunity to seek other work
- Reimbursable expenses
- Regular payment of wages
An independent contractor:
- Invests in the equipment to do the tasks required
- Is more likely to shoulder expenses than to be reimbursed, unless otherwise noted in the contract
- Can seek out other job opportunities and has the freedom to advertise services rendered and maintain a separate office
TYPE OF RELATIONSHIP
Type of relationship defines whether the staff member is an employee or an independent contractor and how each understands the relationship.
This can be seen and identified in:
- The written contract
- Benefits provided by the employer
- Duration and permanency of employment
- Services provided in relation to business operations.
If for some reason the role and category of the staff/worker is not determined by these 3 key bases, then you must fill out and submit the Form SS-8 to the IRS. Either the employer or the staff member can file this form. The IRS will scrutinize and determine the status of the worker, and recommend the proper submissions of tax returns/information and tax to withhold.
For more information on these IRS guidelines, visit: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee