Employee vs. Independent Contractor 

Do You Know The Difference?

While an employee is not the same as an independent contractor, an exact definition is not always clear.  Yet, to avoid unwanted surprises, it is essential that business owners clearly understand the difference and be able to determine how to treat the payments made for services provided.

According to the IRS, you must withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee.  Generally you do not have to withhold or pay any taxes on payments to an independent contractor.

Let’s suppose you are an independent contractor or in business for yourself and provide services to other businesses. In this situation, for tax purposes you are considered an independent contractor.

If you are a business owner that contracts someone to provide a service you need, you must determine whether the person/s providing the services are employees or independent contractors.

Decide which scenario applies to you and then determine the business relationship that exists between you and the individual who is performing the services.  Examples might be:

An Independent Contractor

An Employee (common law employee)

A Statutory Employee

A Non Statutory Employee

All information that provides the evidence of the degree of control and independence must be taken into consideration in order to determine whether the person providing the service is an employee or an independent contractor.

Common law rules states the facts provide evidence of the degree of control and independence and fall into 3 categories:

Behavioral – Does the company control or have the right to control what the worker does and their job performance?

Financial – Are the business aspects of the worker’s job controlled by the payer?

Type of Relationship – Are there written contracts or employee benefits ie; vacation pay, pension plans, insurance, etc.?

All these factors must be considered when determining employee vs. independent contractor.  Yet, there is no “magic” or one factor that defines this.

The keys are to look at the whole relationship, consider the extent of the right to direct and control, and finally, document all the factors used in making the determination.