Wednesday, November 12, 2014

Employee vs. Independent Contractor

It is important for companies to know the difference between what makes someone an employee vs. an independent contractor. Companies are responsible for paying social security taxes, medicare taxes and unemployment taxes on wages paid to an employee. Companies are not responsible for paying these taxes on money paid to an independent contractor. The independent contractor is responsible for paying the self-employment tax (15.3%) in addition to the ordinary tax. Companies may think they are coming out on top and saving money on taxes by misclassifying workers.  There can be tax and  legal trouble for a company if a  worker is misclassified.

Employees vs. Independent Contractors

  •  Employees are dictated by employer what hours to work and how to do the job.
  •  Independent contractors make their own schedules and have more flexibility in how they complete work projects. 
  •  Employees are paid by salary or hourly
  • Independent contractors are usually paid by project, not by hour. 
  •  Employees usually only work for one company.
  •  Independent contractors may work for various companies. 
  • Employees work expenses are covered largely by the company.
  • Independent contractors pay out of pocket for business expenses. 
  • Employees receives fringe benefits such as vacation, sick pay and health benefits
  • Independent contractors do not receive fringe benefits. 
  • Employees receive a W-2 at end of tax year.
  • Independent contractors receive a 1099 - MISC  
This is not an all- inclusive list of the differences between an employee and an independent contractor.

Please refer to the IRS website for further information on classifying workers.

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