Classifying Employees vs. Independent Contractors

You may have been perplexed by the terms “independent contractor” and “employee” in your professional career. When it comes to getting the job done, every company has two options. Their options include hiring full-time staff or working with a contractor.

As a freelancer, you must be aware of the differences between yourself and an employee. Which of the following characteristics distinguishes full-time employees from independent contractors? What is the difference between an employee and an independent contractor?

Take a closer look at this!

Employee

One of the most obvious ways to identify an employee is that they are paid through the employer’s payroll process. The employer is also responsible for paying and reporting the employee’s withheld taxes. Paying them through the payroll system and handling the taxes, on the other hand, does not immediately make them an employee. The ultimate litmus test is whether there is an “employment connection” that fulfills legal requirements.

In general, an employee is subject to the authority of the employer regarding how much work should be done and how it should be done. The employer doesn’t need to direct or control how the activities are carried out.

Independent Contractor

Independent contractors are paid via the payer’s Accounts Payable process and are primarily able to report and pay their taxes. There are legal rules for assessing whether someone is an independent contractor, just as there are for evaluating whether someone is an employee. Because conditions differ, it might be difficult to get the correct judgment.

An independent contractor is responsible for the administration and control of the organization, and services are done exclusively as a consequence of the work, not as a means to an end. The vast majority of public-sector personnel are considered independent contractors rather than employees. Independent contractors are paid only for the services they provide to the company. 

How to tell whether a person is an employee or an independent contractor

The IRS provides guidelines on various variables that might assist decide whether a person is a W-2 employee or an independent contractor. These are the factors:

• Behavioral management: Does the firm in charge know how the employee performs their duties? If this is the case, the worker is most likely classified as a W-2 employee and the employer solely has control over the work’s outcome, the employee is most likely an independent contractor. Employees frequently work on set schedules and receive specialized training for their specialties, and their success is crucial to the organization. However, it’s difficult to manage remote workers/independent contractors, because they’ve their own working schedules.
• Economical responsibility: Is the firm responsible for paying the employee’s paystubs? Is the employer providing tools and equipment for the employee? If the individual answers no to these questions, he or she is most likely an independent contractor. If the answer is affirmative, the individual may be classified as a W-2 employee. Independent contractors are paid on an hourly or project basis, can set their timetables, and their work is not critical to the organization.

• Interaction: Is a worker’s employment critical to the payer’s money? Is the partnership long-term, or does it cease after the task is completed? If the employer pays for the benefits and the connection is ongoing, the worker is most certainly a W-2 employee. Furthermore, a worker with a written contract that contains incentives or exclusionary terms is more likely to be classified as an employee rather than an independent contractor.

Common-Law Principles

The connection between the worker and the business must be investigated to establish whether an individual is an employee or an independent contractor under common law. All material that offers evidence of the degree of control and the degree of independence must be considered in any employee-independent contractor assessment. The following factors give proof of the degree of control and independence.

Instructions that the business gives to the employees or independent contractors.

An employee is often bound by the company’s directions regarding when, where, and how to work. All of the following are examples of different sorts of work instructions. Which tools or equipment should be used? Who to employ or who to assist with the task?

A company may lack the expertise to train certain highly skilled individuals; in other circumstances, the work may need little or no training. The essential question is whether the company has kept the authority to manage the specifics of a worker’s performance or has relinquished that right.

The training that the company provides to its employees.

An employee may be taught to provide services in a certain manner. Independent contractors typically employ their ways.

To what degree does the employee have incurred by companies’ business expenses?

Independent contractors are more prone than employees to have unreimbursed expenditures. It is also crucial to consider fixed continuing expenditures that are incurred regardless of whether work is currently being performed. Employees, on the other hand, may incur unreimbursed expenditures in connection with the services they provide to their employer.

The extent to which the worker offers his or her services to the relevant market.

In most cases, an independent contractor is free to seek out new business prospects. Independent contractors frequently promote their services, keep a visible company site, and are accessible to work in the appropriate market.

How the company compensates its employees.

A regular salary amount is often guaranteed to an employee for an hourly, weekly, or another period. Even if the compensation or salary is augmented by a commission, this typically shows that the worker is an employee. For the task, an independent contractor is frequently paid a fixed fee or on a time and materials basis. 

We hope that after reading this article you’ve now better learnt the difference between employees and independent contractors.