What is the difference between employee and independent contractor and why is it so critical to your business?
In today’s gig economy, employers are beginning to rely more frequently on contractors and freelancers to reduce payroll costs and tax liabilities. There are clear advantages to this arrangement for both employers and employees. Employers have the benefit of using independent contractors as needed, easily ending the relationship and avoiding workers’ compensation and unemployment costs. Employees retain similar flexibility and can often pick assignment or transition easily from one gig to the next. However, employers may miss out on retaining top talent exclusively to their business and more critically, run the risk of running afoul of tax or employment laws if they misclassify an employee. Misclassifying a worker can result in fines, back taxes, and possibly lawsuits from independent contractors who believe they should have been entitled to compensation as an employee (overtime, unemployment, sick days etc.).
The IRS emphasizes the importance of correctly classifying employees. The IRS classifies a worker as an employee or independent contractor depending on how much control a business has over their work. Under a contract employment definition, an independent contractor controls the methods and means of getting work done leaving only the decision to accept or reject the results up to the business/client. Employees are instructed on how, when and where to complete their work, as well as, what tools and equipment to use.
For more details on the impact of hiring contingent workers, check out this article.