How are independent contractors different from employees, and why does it matter? If you’re an employer, you may be wondering whether it’s best to hire a new employee or start a working relationship with an outside contractor. If you’re looking for a new job or other sources of income—you’ll want to compare the pros and cons of employment with those of contract work (also known as freelancing or consulting). Either way, it’s important to understand the main distinctions between employees and independent contractors.
1) Payments and Benefits
Employees are paid on a set schedule or pay period, and they earn either an hourly rate or a salary. Contractors dictate the timing of payments in their terms. Contract work can involve a total amount to be paid upon completion, an hourly or daily rate, or whatever is best suited to the job in question.
2) Taxation
Both the worker and the paying company are taxed differently based on the worker’s employee or contractor status. When employees are paid, the company typically deducts income tax, Social Security, and Medicare from their wages. As self-employed individuals, independent contractors can sometimes claim tax deductions for their business expenses. In addition, while companies must report all money paid to their employees during the tax year, they must only report a contractor’s payments that exceed a certain amount.
3) Control Over the Job
Who controls the details of the worker’s job? A contractor may be expected to deliver a particular end product, but the company typically has less control over how the contractor works. Contractors can often complete a project on their own time, using their own methods, and under their own supervision. Employees are usually held to more specific expectations.
4) Legal Protection
Workers also have different legal rights in each case. Employees are protected by several employment and labor laws on the state and federal level, while independent contractors typically are not. They must rely on the individual strengths of their contracts to protect them from liability and disputes.
5) Tools and Equipment
Who owns the tools and equipment that the worker uses to complete the job? Employees generally have access to certain tools provided by the company, like computers and printers in an office setting. An independent contractor performing a similar job might use his or her own personal computer to work. Contractors can sometimes claim an equipment purchase as a business expense.
Perhaps the most important point to understand about the distinction between employees and contractors is that, based on the guidelines listed above, sometimes a contractor can be legally deemed an employee. This can create potentially disastrous unintended consequences. For example, a company may enter into a contract with an independent contractor, and the contractor may get injured while working for the company. Because the company controlled the times at and manner in which the contractor performed the job and furnished all of the tools the contractor needed to complete the work, the contractor may be legally deemed to be an employee of the company, thereby imposing liability on the company for the contractor’s injuries.
Are you hiring a new employee or discussing temporary work with a consultant? You should have a knowledgeable lawyer on your side for help with legal matters like negotiations, contracts, and employment disputes. The Law Office of Chris Clark, PLLC can do all of that and more. Get in touch with us to speak with an experienced attorney who is well-versed in employment and business law.
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