Press Release

What Is The Difference Between An Employee And A Contractor?

San Francisco United States
Categories: Non-Engineering / United States Tags:
payroll for different types of contractors

To meet all legal requirements set by the IRS, employers must ensure that the individuals they hire are correctly classified as either employees or independent contractors. Otherwise, they risk discriminating against employees benefit eligibility and compensation, according to federal and state laws.

To help you correctly classify employees and contractors and avoid litigation, here is a basic explanation of what makes them different.

Employee vs. contractor

A contractor (also called an independent contractor) is an individual who operates as a company and can complete work for several different clients. According to the IRS, in a relationship between an employer and a contractor, the payer only has the right to control or direct the result of the work. In essence, they can’t control what will be done or how it will be completed. As a result, contractors typically complete their work using their own equipment and invoice the payer when projects are completed.

On the contrary, employees have a different relationship with their employer. For example, an employee’s hours of work are typically dictated by the payer, they receive tools or equipment from the payer to complete their work, and the manner in which they work is controlled by the payer.

Payroll for different types of contractors

Another main difference between independent contractors and employees is that employees earn a regular, steady wage or salary. But independent contractors are usually paid a flat fee per individual project or based on the hours of work they complete. Employers don’t normally have to withhold or pay any taxes on payments to contractors, but any payments a contractor earns is subject to self-employment tax.

A warning against misclassification

Some companies may purposely misclassify employees to avoid paying overtime or minimum wage. However, employers who misclassify their employees (whether purposely or by mistake) are liable for employment taxes. Employees or contractors may also sue them, which can result in companies paying thousands of dollars in penalties, per individual.

If you are an employer, you’re highly encouraged to do your due diligence to ensure anyone you employ is properly classified and compensated. If you’re unsure, you can use the IRS document Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, as a resource.