Employee and Independent Contractor Classifications Defined

As your company grows, the size of your staff will, too.  Depending on the roles the people on your team will fulfill, they can either be classified as independent contractors or employees.  This distinction can be a complicated process and revolves around the working relationship between the individual and the company.

 If a company has the right to control what is to be done, how it is done, which tools are provided and if expenses are reimbursed, a person is probably an employee.  Conversely, an individual is probably an independent contractor if the company directs only the result of the work.  Independent contractors generally have invested into their services and may provide these services to others outside of your company. 

Other factors taken into consideration for worker classification include:

1.  Can the employer and worker part ways without penalty?  The right to discharge or terminate a relationship is present in an employer/employee relationship; however, discharge or termination in an independent contractor situation may constitute a breach of contract.

2. Is the worker paid fixed wages calculated on hourly or weekly basis?  If yes, the worker is more likely an employee.  Independent contractors typically perform a specific job at a fixed price.

3. Does the worker have the right to employ assistants?  The exclusive right of the worker to hire, supervise and completely delegate the work of assistants is an indication of an independent contractor.

An employer misclassifying an employee as an independent contractor fails to pay mandatory employee withholding taxes, FICA taxes, unemployment taxes and workers’ compensation premiums.  Not only does this jeopardize a fair and competitive marketplace by underbidding honest law-abiding businesses, this can also result in devastating penalties and fines, interest on back taxes and criminal charges to the employer under various laws.  In addition, the employer may be responsible for the incorrectly classified employee’s unpaid income taxes.

The IRS has provided a video workshop that outlines and demonstrates the differences between independent contractors and employees.  Click here and when the video loads, select Lesson 6.  

Taking the time on the front end to determine the correct classification for your team members will save time, money and your sanity in the long run.