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Employee or Independent Contractor? Know the Difference

by
Julie Farless
on
12/29/2021
Employee or Independent Contractor? Know the Difference

Long before the “gig” economy overtook American business, companies were hiring independent contractors to shoulder some of their most important work.  Though independent contractors can take on the same types of projects as employees, there is a significant difference between the two, and there are important reasons for business owners to familiarize themselves with those differences. Independent contractors do much of their assigned work on their own terms, and in exchange for that flexibility and autonomy they do not enjoy the same labor law protections as do employees. They are also responsible for withholding their own taxes and purchasing their own healthcare coverage. 

If you are a business owner, the responsibilities that you have as an employer make it essential for you to be able to distinguish employees from independent contractors. If you have any uncertainty, the answers to the following questions should make things clear.

  • Who has control over how the worker does their job? 

If the worker determines what hours they work or how they are going to approach the end result they are working towards, they are likely to be an independent contractor. Independent contractors can make their own hours, choose where they want to work, and negotiate their own terms rather than adhering to employee handbooks, signing in and out, etc.

  • Who determines what tools the worker uses or how they get paid?

If a worker uses their own tools and determines how often they are getting paid, they are likely an independent contractor. 

  • Did the individual go through the same type of hiring practice as an employee does?

Though independent contractors may go through a bidding and interview process, it is different from what potential employees go through. While employees are generally processed through a Human Resources department, an independent contractor's interaction is usually limited to the department that is hiring them to do the work, and does not include providing information about marital or citizenship status. Independent contractors generally provide a contract for the work that they do, and rather than fill out a W-4 tax form they fill out a W-9 form.

  • Is the worker being provided with a pension, health insurance coverage, vacation, and sick time based on a schedule controlled by the organization? 

If those benefits are being provided in keeping with what is being offered to other employees, then the person is likely an employee. 

  • Is the worker permanent or are they working for a specified period of time or for the duration of a specific project?

If the person is interviewed and brought in to work indefinitely, they are likely an employee. Those who work in support of a specific project or for a limited period of time are more likely to be independent contractors.

Companies are vulnerable to penalties imposed by the Internal Revenue Service for improperly classifying an employee entitled to benefits and labor law protections as an independent contractor.  To help ensure that organizations are categorizing their workers properly and withholding taxes where appropriate, the agency offers a test that determines the level of control and economic dependence that a business has over the individual. 

If you are considering bringing an individual onboard and aren't sure whether they should be classified as an employee or an independent contractor, don't leave it to chance or guesswork. Contact a tax professional for guidance.

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Julie Farless

Julie Farless

Martinez & Shanken, PLLC is a Certified Public Accountant (CPA) firm based in Gilbert, Arizona. We provide a full range of accounting, bookkeeping, consulting, outsourcing and business services, but we specialize in tax preparation. We work with you to ensure that your personal or business processes are conducted in a manner that ensures ongoing integrity in your financial transactions. We are available to answer your questions and help with your ongoing tax planning and changing business needs.

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