What’s the difference between independent contractors and employees? The penalties can be severe, so here’s how to get it right.
The difference between independent contractors and employees is more than just a label. There are important legal and project considerations when determining how to categorize a worker. This classification is important for a number of reasons, from worker efficiency to avoiding misclassification penalties. Here’s what you need to know before adding either to your small business.
Payments and Taxes
The most notable difference between independent contractors and employees is the way they are paid and taxed. A 1099 independent contractor is typically paid a lump sum from the employer and he or she is responsible for all tax implications.
Unlike independent contractors, W2 employees are paid on a regular schedule with tax withheld from the employer. Employees do not have to worry about taking taxes out of their paychecks. Based on an employee’s designation there is a big difference in how they are paid and taxed.
Employees are covered by federal and state labor laws, which protect them from discrimination, health and safety concerns, earning less than minimum wage, and other work-related issues. As an independent contractor, you lose these protections.
When deciding on whether to hire an employee or an independent contractor, there are many factors to consider. Start by asking the right questions to determine the type of working relationship that’s best for your company.
- How much control/direction would you like to have over the worker and the project?
- What financial responsibilities are you comfortable with?
- Are you hiring for regular work or a one-off project?
- Will you offer benefits?
Keep in mind that employers must meet all of the requirements to classify a worker as an independent contractor. If requirements are not met, the employer will face several penalties and be held accountable for any back wages or fees. Don’t take the risk if you’re unsure whether or not the individual meets all of the necessary requirements to be classified as an independent contractor. When in doubt classify the individual as an employee to protect yourself and your company.