Dynamic Happenings

Employee OR Independent Contractor: Know the Difference

March 02, 2014 General

Is your worker a Contractor or an Employee?

You are not the only one having a hard time drawing a line between the two. As
per Department of Labor, 3 in 10 employers misclassify their workers. The
confusion arises primarily because the definitions are not clear-cut and vary from
one tax jurisdiction to another. But if you do not classify it right, you might become
liable to increased tax liability and heavy fine and penalties, and complex legal ramifications.

Here are the essential differences between the two.

	Employee	Independent Contractor
1.	Provides regular services for a fixed compensation	Runs own business and provides contractual services as per the agreed rate
2.	The employer holds the right-to-control over an employee, subjecting him to fixed working hours, location and resources	The employer holds no such right-to-control over a contractor, thus he holds the privilege to decide his own working hours, location and resources
3.	Is entitled to certain benefits such as health insurance, paid leaves, company outings, etc.	May not be entitled to such benefits
4.	Is supposed to work for one company at one time	Can work for two or more companies at one time
5.	Paid on a regular basis	Most commonly paid once the work is delivered
6.	As an employee, you get your pay after tax deductions are made, as your company becomes liable to file and pay your taxes, be it Federal Income tax, State Income Tax or FICA (Social Security and Medicare)	As an independent contractor, you get your pay without any deductions, as your company is not liable to file and pay your taxes, be it Federal Income tax, State Income Tax or FICA (Social Security and Medicare)

And this brings us to our next table - the difference between form W2 and form 1099

	Form W2	Form 1099
1.	As an employee, you need to fill form W-2 showing your total income and the amount of taxes that your employer withholds from your pay	As an independent contractor, you need to fill form 1099-misc showing what the company paid you
2.	Form W-2 implies that you are paid on a taxed basis	Form 1099-misc implies that you are paid on an untaxed basis

Many workers prefer to be classified as a contractor rather than an employee. As a contractor, you are free to set your own working hours, get a higher paycheck and save substantial taxes. But not all of it is true! Yes, we agree that it works in the short run. But from a long term perspective, independent contractors are liable to pay higher taxes than employees. So make your choice wisely!

IRS 20 Point Checklist

It must have become quite obvious by now that every time an employee is misclassified as an independent contractor, the IRS loses substantial tax revenue.

How big can it be? Well, somewhat around billion dollars. The Internal Revenue Service (IRS) has finally intervened and announced a 20 Point Checklist to determine whether to classify your worker as an employee or a contractor and eventually whether to pay your worker on W2 or 1099. Take a quick look –

1. Does the individual take instructions from your management staff regarding when, where, and how work is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
4. Does he individually perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
6. Is there a continuing relationship between your company and the individual?
7. Does the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Does the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses?
14. Do you supply the individual with needed tools or materials?
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. Can the individual terminate his services at any time?

And here’s how to calculate the results -

For Q.No. 1 - 16, if you answered ‘Yes’, the worker is to be considered as an employee; if you answered ‘No’, the worker is to be considered as an independent contractor.
For Q.No. 17 - 20, if you answered ‘Yes’, the worker is to be considered as an independent contractor; if you answered ‘No’, the worker is to be considered as an employee.

The difference must be quite clear by now. But if you are still unsure whether to classify your worker as an employee or independent contractor, consult a tax expert or financial consultant. You can also request a formal determination on Form SS-8. Another way to is to participate in the Voluntary Classification Settlement Program (VCSP), which not only helps you sort out the difference between the two but also gets you entitled for financial relief from any outstanding employment tax obligations.

Widget is loading comments...

Enjoy this post? Share it with others.

Recent Posts

Categories

Monthly Archives

Dynamic Happenings

Employee OR Independent Contractor: Know the Difference