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Employee vs. Independent Contractor: What Employers Need to Know
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Jul 2010
As an employer, it is crucial that you understand the distinctions between an independent contractor and an employee so that you can be sure you are abiding by federal and state tax laws.
Employee vs. Independent Contractor
If a worker is an employee, the employer is responsible for paying Social Security, unemployment insurance, Medicare, and possibly other costs like workers' compensation insurance for the employee; at the end of the tax year, the employer is responsible for compiling all necessary payroll reports, including W-2 forms.
If a worker is an independent contractor, the employer is not responsible for any of the above taxes or payments, and the only added paperwork is the issuing of a 1099 to the independent contractor at the end of the tax year, if he or she has made more than $600 with the employer.
So why not just call everyone who works for you an "independent contractor" and save time and money? Because you, as the employer, are not the one who decides whether someone is an employee or an independent contractor; the law does, and there could be penalties if you make an incorrect determination.
Employee or Independent Contractor?
The IRS (Internal Revenue Service) lists three categories of information to be considered in the determination of whether an individual is an employee or independent contractor:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (These aspects include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee-type benefits (i.e., a pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
An employer must show there is a reasonable basis to classify the worker as an independent contractor in order to escape the burden of paying taxes for the worker.
If you still aren't sure whether a worker is an independent contractor or employee, the IRS provides Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF); either the worker or the employer can fill out and send in the form, and the IRS will review the situation and tell you its determination on the matter.
Claiming an Employee as an Independent Contractor
If you have claimed an employee as an independent contractor, the IRS may hold you responsible for employment taxes for that worker; there are steeper penalties for "willful neglect" as well under Internal Revenue Code Section 3509.
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Comments
Submitted by on Jun 28, 2010 - 12:15PM
Hello,
I am a new start up consulting business in which Legal Zoom in which your company did the work for my LLC. I have a question. I am interested in hiring a virtual assistant for 6 months to do various jobs such as promote my book, get booksigning events for me, etc. she submitted a contract to me and states she is an independent contractor and she gave me her hourly rate. Do I need to have a contract for her to sign or is hers fine for the both of us? What will I need to do at the end of the year as far as the monies I have paid her for her 6 months of service? I really appreciate your help. I am very new with my business, The Dee Burrell Institute for Women, LLC. I am so pleased with the service I recieved from Legal Zoom and share it with my friends.
Thanks,
Dee Burrell
Submitted by on Jun 28, 2010 - 1:18PM
Fact is, everyone is an independent contractor in todays world. All you are promised is what they owe you on the next paycheck, after that all bets are off. Sounds like an independent contractor to me.
Submitted by on Jun 30, 2010 - 5:50AM
Not true. Most jobs come with additional benefits other than just a paycheck. And at the very least least a regular employee gets unemployment, worker's comp, and half of their SS taxes paid by the employer.
Submitted by on Jun 28, 2010 - 2:23PM
I have a complaint. I am an independent contractor. I am a title searcher and get paid by each search I do. I pay estimated taxes quarterly, my own gas, my own supplies, etc. It is very slow right now because of the economy and was just informed that my biggest client does not have enough work for me and will use their in-house searchers. My complaint is that I cannot collect unemployment. I pay more taxes than the employee working in an office. I have to pay my own health insurance, also. But I cannot claim unemployment benefits. I don't think this is fair.
Submitted by on Jun 30, 2010 - 5:47AM
The reason you can't claim unemployment benefits is because you have not been paying unemployment insurance. You can't take money out of the system when you have not been paying into it. I think that is fair.
Submitted by on Jun 29, 2010 - 1:44AM
I have been acting as an independant contractor for a large apartment complex in my city. I have been doing this since 2008. I orriginally asked them for a job and was told no. They were keeping there payroll taxes down.
Of tyhe above three issues, the only one that they don't do is tell howe toi do the job. Other than that I am ay there beckon call. I have two other people that work for/with me and I treat them as IC also. The differience being is that I can't aford the taxes. I have 88,000.00 to care for 375 Apartments and seven buildings. They turn over apartments at the rate of about 3.5 per week. I take care of all cleaning, some security, the pool and some maintenance.
Whatto do
KRwright
Submitted by on Jun 29, 2010 - 6:23AM
Do I as an independent contractor need to be concerned if the person I am working for reimburses me for mileage incurred in the performance of my contract?
Submitted by on Jun 30, 2010 - 5:53AM
I have been an IC for 3 years under the same guy. He treats me like an employee. Even tells our customers the I'm an employee. I think I should an employee, not be an IC, but I am afraid I will lose my job if I report him. I don't know what to do. Any advice?
Submitted by on Jul 5, 2010 - 6:49PM
Why don't you talk to the employer about becoming an employee? Discuss with the employer what is important to you - do you need or want benefits? If you are seeking benefits, you can negotiate your hourly rate to include the mark up for benefits that you need. Situations change and if it isn't to your advantage to remain an IC, let the company know. In most situations, the company values the relationship and will work with you to keep you.
Submitted by on Jul 1, 2010 - 11:45AM
looking at all these messages, it appears we, as ICs are all in the same boat. we keep getting our contract renewed, we are only doing work for one company, we WANT to be an employee, mostly for taxes and benefits, but can't because the company we are contracted to wants to save money. we can't complain because we WILL lose our jobs because someone else will always be available to replace us as an IC.
Submitted by on Jul 2, 2010 - 1:26PM
I have two people that do work for me that requested to be paid as independent contractors...at rates that are hire than those of my comparable employees...taking into consideration that I don't have to pay benefits and of course employ them when there is no work...that hasn't occurred...so..
what the advantages of being an Independent contractor...?
Submitted by on Oct 24, 2010 - 10:12AM
I am a retired person recently. I have the Knowledge , Skills, and ENERGY to provive additional income. I also have three LLC,s that fall under my Trust.
I am ready to start yet another small enterprise that will act as an Independent Contractual arrangment.
WHAT IS A GOOD EXAMPLE OF EMPLOYER/INDEPENDANT CONTRACTOR CONTRACT?
Submitted by on Jan 6, 2011 - 10:54AM
I am on the site trying to figure out how to inorporate my llc. What do i do first? or what do i click on to start the correct process? (I think i did it incorrectly...)
Submitted by on Jan 6, 2011 - 12:20PM
Please follow this link below to start the process.
http://www.legalzoom.com/limited-liability-company/limited-liability-com...
You will need to click on the Get Started link to start the application. If you have any other questions, please feel free to contact a Business Services Specialist at (888) 381-8758.
Submitted by on Jul 2, 2010 - 1:01PM
I have two independent contractors that do work for me, both have requested to be contractors...instead of employees...what is the advantage to them to do so...?
Submitted by on Sep 25, 2010 - 9:10AM
I am a 1099 contractor and I have a key to the facility that I work. Do i need to turn this key in since I am not an employee of that company?
Submitted by on Nov 4, 2010 - 10:02PM
My Broker is now telling me what type of real estate I can sell and what I cannot sell? I too am a Broker and have sold commercial as well as residential real estate for years. Now, he is trying to tell me that I cannot do both. As an Indpendent Contractor, is he allowed to do this?
Submitted by on Dec 16, 2010 - 11:10AM
Thanks for your inquiry. Just a reminder: LegalZoom makes it easy and affordable to create your own legal document, but we don't give specific legal advice. We can help you find an attorney with our attorney referral network: http://attorneyconnect.legalzoom.com
Submitted by on Apr 10, 2011 - 5:06PM
I have been looking for a job, and one of the most attractive is a sales job. The company says it requires all its salespeople to be independant contractors.
In reading your descriptions, I am confused. The only thing the company is going to supply me are samples to show, and the leads to sell. Everything else is up to me.
I have no need for the benefits package, even if they offered one.
Based on what I read, it seems I should be an employee. Shouldn't I have the option?
Submitted by on May 25, 2011 - 6:56AM
I have 12 independent contractors that we use as a sales force. I have issued a company credit card to each of them to cover their expenses to simplify their cash flow. They are required to justify all expenses monthly. Is this legal under IRS regulations and are they still considered "independent contractors" by the IRS?
Submitted by on Jun 22, 2011 - 6:43AM
Thanks so much for your question. LegalZoom makes creating legal documents easy and affordable, but we unfortunately can't give specific legal advice regarding IRS regulations. However, you can get free legal advice on the LegalZoom Facebook page every Friday. Check out Free Joe Friday: http://zoo.mn/FreeJoe.
Submitted by on Aug 12, 2011 - 1:57AM
Im an employee with the same company for 3 years and my boss told me he is changing my status to an independent contractor and if I dont like it then I will be on the unemployment line is that legal?
Submitted by on Oct 10, 2011 - 9:53AM
Hi Chris, thank so much for your inquiry. LegalZoom makes creating legal documents easy and affordable, but we are unable to provide legal advice regarding this situation. However, you can get free legal advice on the LegalZoom Facebook page every Friday and Tuesday. Check out Free Joe: http://zoo.mn/FreeJoe.
Submitted by on Aug 17, 2011 - 2:22AM
I would like to ask if there are any legal actions that can be taken against a contractor who were assigned to a particular position, apparently the contractor is just submitting false activity reports but didn't performed the job at all.. The contractor is based overseas and the employer is also based from another country.. is there any prevailing law on this kind of situation?..your reply is much appreciated
Submitted by on Oct 23, 2011 - 6:54PM
Hello, I am requiring my independent contractors to get their own insurance. Do you know which companies offer such insurance?
Submitted by on Mar 4, 2012 - 12:32PM
I've been an employee, an "outside sales representative" with a company for many years. I was on steady salary, had no benefits, and and no pension arrangement. I paid taxes with a W-2 form, and took business expenses deductibles.
Unfortunately, I never brought in the amount of sales to deserve the salary I was getting, based upon what the formula is for commission. Now the company is giving me a major cut in salary, and telling me to become an independent contracter, and to apply for an LLC. My relationship with the company has been and continues to be very good. They are doing this to keep afloat.
My questions are,
(a) Is there any financial benefit to me with this new arrangemet over the old one? Will my taxes skyrocket?
(b) Does this new arrangement necessarily entail that I would be filling out a 1099 rather than a W-2?
(b) Is there an option under this arrangement, and would it be beneficial to me, to continue getting a W-2 for the salary, and a 1099 for any deserved commissions above that salary?
Submitted by on Apr 18, 2012 - 8:06AM
Thank you for contacting LegalZoom, Questioner. While we make creating legal documents easy and affordable, we can't give specific legal advice regarding this situation. However, we may be able to help you find an attorney who can assist you through our Business Advantage Pro plan! Please visit https://www.legalzoom.com/attorneys-lawyers/legal-plans/business.html for more details.
Submitted by on Mar 8, 2012 - 6:02PM
I own a pest control company and hae a technician who did seasonal spraying for me last year. We were flexible with his schedule and other side jobs so we paid him 1099 as it wasn't full time and he isn't liscensed under our company. This year we will be needing him more full time even though he will probably be doing other side jobs as well. He prefers 1099 but i don't want to break any laws. If he is working with us close to 40 hours a week but still has side jobs can we pay him 1099?
Submitted by on May 9, 2012 - 10:13AM
Hi Cam and thank you for contacting LegalZoom. While we make creating legal documents easy and affordable, we can't give specific legal advice regarding this situation. However, we may be able to help you find an attorney who can assist you through our Business Advantage Pro Plan! Feel free to visit http://www.legalzoom.com/attorneys-lawyers/legal-plans/business.html for more details!
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