Employee vs. independent contractor: Which should you choose? Both are important worker classifications that businesses need to understand.
Should I classify a worker as an employee vs. an independent contractor? This is one of the most common questions pondered by small businesses owners throughout the country. Proper worker classification is essential to remaining compliant; however, it’s often confusing for many business owners. To help answer this complicated question, the best place to begin is by understanding the difference between employees and independent contractors.
Employee Vs. Independent Contractor: What is the difference between the two?
The overall difference of employees vs. independent contractors is control. Employees are governed by their employers, and contractors are governed by themselves.
Employees are individuals who work for a single company that dictates their schedule and work. They also get paid regular wages, have taxes withheld, and receive benefits. On the other hand, contractors often work for multiple clients, determine their own schedules and workload, and pay their own taxes.
To help businesses distinguish employees vs. independent contractors, the IRS has outlined three key common law rules categories: behavioral, financial, and type of relationship.
- Behavioral: Who has control over what the worker does and how they perform their job?
- Financial: Who controls the business/financial aspects of a worker’s job?
- Type of Relationship: How do the worker and business perceive their relationship?
Weighing these factors helps establish the worker’s levels of control and independence and, thus, better distinguish whether they are an employee or independent contractor.
Why does accurate classification of employees vs. independent contractors matter?
Essentially it all boils down to taxes and remaining compliant with the law. According to the IRS, “Worker classification is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Businesses normally do not have to withhold or pay any taxes on payments to independent contractors. The earnings of a person working as an independent contractor are subject to self-employment tax.”
Whether done intentionally or unintentionally, misclassifying workers is a costly mistake that can result in civil and criminal penalties, including fines, damage awards, and even imprisonment.
Choosing the Correct Worker Classification
If you are still uncertain about worker classifications or other personnel administration requirements, Convergence Employee Leasing is here to help. As a professional employer organization, we take on some of the tedious administrative tasks like worker classification and payroll processing so you can focus on running and growing your business.
Over the last decade, we have provided professional employer organization services to small and medium-sized businesses throughout Jacksonville and the entire state of Florida. Contact us today to learn how we can help ensure your business’s worker classifications are compliant with the law.
