Jun15
Independent Contractor or Employee? Know the Difference.
In a client consulting session a few weeks ago, we were discussing how this couple’s business had grown past their personal capacity to get everything done. They were putting in long hours with lots of late nights, working weekends and starting to get burned out.
It became obvious, it was time to hire.
The conversation then turned toward whether or not this couple should hire an independent contractor or an employee. Knowing the difference between the two is critically important. If you get it wrong, IRS penalties can be painful. Here’s some help distinguishing between the two and how to stay away from IRS trouble:
An independent contractor:
- Negotiates their rate of pay.
- Sets their own schedule.
- Can refuse work or projects.
- Provides an invoice for services performed.
- Often works for other people.
- Uses their own supplies.
- May get reimbursed for expenses.
- Usually works on a project by project basis rather than for an indefinite period of time.
- If an independent contractor’s services are terminated, they are not eligible for unemployment benefits.
An employee:
- Is under the employer’s direct control, whether full or part-time.
- Works for a set rate of pay.
- Works a schedule determined by the employer.
- Is provided the work space, tools, and supplies needed for the job.
- May be required to punch in and out or keep a time sheet.
- Is offered benefits such as health insurance, worker’s comp, and retirement that an independent contractor is not eligible for.
- If an employee is terminated, they are eligible for unemployment benefits.
Here’s how to avoid IRS trouble:
- Incorporation: If an independent contractor has incorporated his or her business, then the IRS will not question the status as an independent contractor.
- A written contract: A good written contract will help set an independent contractor apart from an employee.
- Other clients: If a contractor can point to references or testimonials from other clients, the IRS will accept the status as an independent contractor.
- Benefits: A company providing benefits—such as health insurance or paid vacation—to a contractor is a big red flag for the IRS.
