What’s in a name? Actually, a lot—at least when it comes to “independent contractor” vs. “employee.” Understanding employee classification is extremely important for both employers and workers. If companies are intentionally wrongfully classifying workers, there can be a lot at risk for both parties.
Whether you’re hiring workers or being hired, it’s important for you to be informed about the different classifications of workers and what these classifications mean.
What are the Differences between Independent Contractors and Employees?
According to this infographic from WunderLand Group, there are several differences between independent contractors and employees that both parties should be aware of.
1. Employees are employed by the company.
While employees are technically employed by the company, independent contractors are self-employed, meaning that they are in business for themselves.
2. Employees are part of the company.
Depending on the conditions of your employment, if you are an employee of a company, typically you are a long-term part of that company. On the other hand, independent contractors are usually hired on a per-project basis, which often means they have no set time commitments with the company.
3. Employees are paid primarily by one company.
Employees will receive payment from the company that they work for. Independent contractors will be paid by each of their clients separately.
4. Employees are given access to company resources.
A company will usually provide its employees with necessary tools, resources, and training, but independent contractors do not receive the same benefits. Contractors must provide their own resources and tools and usually forego training.
5. Employees work under the company’s time frame.
Independent contractors usually do not have to adhere to company requirements regarding hours worked per week. Employees, on the other hand, must adhere to the policies and requirements of the company.
6. Employees must sign a W-2 tax form.
For tax purposes, employees must fill out W-2 forms, while independent contractors sign W-9 forms.
7. Employees have a set pay rate.
Though it is often up to their own discretion, independent contractors are usually paid per project. Employees, however, are paid according to their companies’ policies—either per hour or on salary. Employees have taxes withheld from their paychecks, while independent contractors do not.
8. Employees are eligible for benefits.
Employees are given company benefits (such as health care, dental care, 401k, etc.), for which independent contractors are not eligible.
Risks of Intentionally Misclassifying Workers
Despite the time and money that employers may be trying to save themselves by intentionally misclassifying workers, there are several risks associated with the practice that make it an unsafe business decision.
First, employers may face serious trouble with the IRS. If a company is found to be intentionally misclassifying workers, the company may face significant fines from the IRS and may be forced to pay years’ worth of back taxes.
Workers who legally qualify as employees yet are considered independent contractors by their companies are at risk of being taken advantage of. They may be missing out on countless benefits that they are legally entitled to. If workers determine they have been misclassified, they have every right to file a report with the IRS.
There are Better Options
To keep themselves out of trouble, employers should never intentionally misclassify their employees and should consult with attorneys to make sure they are in compliance with all laws. To save money lawfully, employers may consider working with a staffing firm or temp agency.
To keep themselves safe and ensure that they are not taken advantage of, workers should be aware of all relevant laws and IRS regulations. If you agree to be classified as an independent contractor but know you are not, you can make a report to the IRS, which may entitle you to compensation that you had not previously been receiving.
For both employers and employees, worker classification is an important consideration. It will benefit both parties to familiarize themselves with IRS rules and the laws relating to employee classification.