More than one government agency has a test to define what an independent contractor is. Each has its own angle, which means independent contractor vs employee that each has a slightly different focus. That said, many test factors coincide, while others contradict each other.
- Depending on the position, the employer may also need to provide the newly designated employee with their rightful benefits.
- Nevertheless, employers do not automatically own all intellectual property created during an employee’s employment.
- If the carpenter has a public-facing shop or office, advertises publicly online, and is otherwise prepared to take on work from anyone, that would be a « yes » in answer to this question.
- Some states have adopted special rules defining when workers qualify as independent contractors.
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Understanding the difference between an independent contractor and an employee requires careful consideration, and both types of employment come with unique advantages and disadvantages. The typical penalty is a fine, which can be steep depending on the severity of the offense. In most cases, the IRS will assess the situation and cut employers off when they think it was an honest mistake. Nevertheless, if the IRS deems the misclassification intentional, the misclassification is considered fraud, and the guilty party may face criminal prosecution and even jail time. In most cases, a client cannot control which tools or methods a contractor uses to complete the work unless it’s specifically agreed to in the contract terms.
Department of Labor (DoL) issued its final rule clarifying who an independent contractor is versus an employee. Earlier, the National Labor Relations Board (NLRB) eliminated three of its factors that clarified the definition of an independent contractor. Meanwhile, the IRS held fast to its two key points with nine clarifying https://www.bookstime.com/ aspects. Here’s a handy independent contractor vs. employee chart to help you understand the biggest differences between the two types of employment. With this rise in usage comes greater risk of worker misclassification, because the rules around classification are not easy to interpret and are frequently changing.
The difficulty in applying this right of control test is that control isn’t always easy to determine. Government auditors can’t look into a hiring firm’s mind to see if it is controlling a worker. Initially, it’s up to the hiring firm to determine whether any person it hires is an employee or an IC. Quite simply, whenever the worker is running an independent business and you treat that person accordingly.
Benefits for the Company contracting Independent Contractor
This program offers partial relief from federal employment taxes for eligible businesses who agree to prospectively treat their workers as employees. Businesses must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program (VCSP), and enter into a closing agreement with the IRS. The most common way companies get into trouble with misclassification is by not paying overtime. To save money, they’ll wrongly misclassify employees as independent contractors to specifically not pay overtime. They also save money because they don’t have to pay taxes on independent contractors, can’t get sued under most of the discrimination laws, and don’t have to deal with unions. If you’re an independent contractor, classification matters because it determines what taxes you pay and what benefits you’re eligible to receive.
- Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.
- These independent contractors are generally self-employed and are self-responsible for the management of their tax payments, Social Security, etc.
- Whether you classify someone as an employee vs. independent contractor will determine whether you are obligated to protect their legal rights relating to reliable pay, benefits, and protection from discrimination.
- Clients are encouraged to seek advice from their own legal advisors.
- The best way to prevent misclassification is to be proactive and acquaint yourself with the IRS’s definitions.
- Also remember that misclassifying employees as contractors carries a much higher penalty than misclassifying the other way around.