Employees usually work specific hours that are defined by their contract, either remotely or at the employer’s premises. If you’re a business using independent contractors, particularly ones not under a business-to-business contract, you need to ensure they truly are independent contractors in the eyes of the IRS. It is possible for a worker to be an independent contractor at one company and an employee at another. While no longer the most popular option, research does show that given the right growth conditions, traditional full-time employees (when remote) can be productive and engaged over the long-term.

One of the most important business strategies remote businesses must develop is their hiring strategy, specifically whether to hire employees or independent contractors. As previously discussed, this decision has the potential to present significant legal ramifications. From taxation, to benefits, to termination liability, employees and independent contractors are treated differently in the eyes of the law. While hiring independent contractors can save the business money on payroll, taxes and benefits. It is important to make sure that the employees you hire classify as IC and actually meet the legal criteria as such.

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However, there are severe penalties for doing so, including fines and back pay owed to the employees. Whether you classify someone as an employee vs. independent contractor will determine whether you are obligated to protect their legal rights relating to reliable pay, benefits, and protection from discrimination. Contractors define their own rates and payment terms, and issue invoices https://www.bookstime.com/ for all completed work. Retainers are also common for contractors who work with a company on a regular basis or who require advance payment for supplies. Employees are paid an hourly wage or a monthly salary, as defined in their permanent employment contract. The employer withholds tax contributions and defines on which day of each week/month the employee will be paid.

As a result, there is a growing demand for independent contractors across a wide range of industries. While ICs do have to pay more in taxes than employees, they also have the ability to deduct certain business expenses from their tax returns. According to the US Department of Labor, these contractors are usually classified as self-employed individuals who control their work schedule, and business processes, earning a commission for each job they complete. Here’s a handy independent contractor vs. employee chart to help you understand the biggest differences between the two types of employment.

Payroll, compensation, pension & benefits

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

To further understand this movement, let’s take a look at some of the commonly cited advantages and disadvantages of hiring independent contractors. While it is easy to say that independent contractors are simply the opposite of full-time employees, it would serve us well to review in what distinct ways they differ. Whereas an employee is subject to the full authority and control of their employer, independent contractors work with multiple clients on a per project basis OR with one company for a specified period of time. They are paid an hourly wage and are responsible for securing (on their own) almost every benefit allocated to full-time employees. There are many ways in-house counsel can demonstrate their value to the company.

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Businesses must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program (VCSP), and enter into a closing agreement with the IRS. For federal employment tax purposes, the usual common law rules are applicable to determine if a worker is an independent contractor or an employee. Under the common law, you must examine the relationship between the worker and the business. You should consider all evidence of the degree of control and independence in this relationship.

• You will also need to pay self-employment tax, which includes Social Security and Medicare.
• They also generally must pay self-employment tax which is social security and Medicare tax as well as income tax.
• Therefore, washing your clothing in hot water and drying them on the highest heat setting can effectively exterminate these pests.
• When it comes to small business hiring, there are many types of employment contracts you can offer the people that work for you.
• From taxation, to benefits, to termination liability, employees and independent contractors are treated differently in the eyes of the law.
• Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business.

Today, independent contractors can now be hired as needed, and if demand for work slows down or stops, specialized labor can be reduced or cut. Consequently, it is critically important that in-house counsel take steps to ensure the company is engaging independent contractors in the right manner. When you file your return, you will need to include Schedule C, which is used to report your business income and expenses. You will also need to pay self-employment tax, which includes Social Security and Medicare. For more information on how to determine whether you are an independent contractor or an employee, please consult with a qualified tax professional.

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Generally speaking, you must withhold and pay income taxes, social security taxes and Medicare taxes as well as pay unemployment tax on wages paid to an employee. You can find more information on employer tax obligations on the IRS website or this guide on setting up payroll for small businesses. Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee, the business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.

• Worker misclassification can result in a number of problems for you as an employer.
• While it is easy to say that independent contractors are simply the opposite of full-time employees, it would serve us well to review in what distinct ways they differ.
• They are paid an hourly wage and are responsible for securing (on their own) almost every benefit allocated to full-time employees.
• Within the context of a remote team, a full-time worker will engage in remote work 100% of the time.
• If an employer-employee relationship exists (regardless of what the relationship is called), then you are not an independent contractor and your earnings are generally not subject to self-employment tax.

According to the IRS, ICs are accountable for paying their own Social Security and Medicare taxes, as well as any federal and state income taxes. As we stated before, the first thing you should know is that an independent contractor is not entitled to the same labor and employment protections as employees. This means that if an independent contractor is injured on independent contractor vs employee the job, he or she is not entitled to workers’ compensation benefits. A misclassified employee can also result in financial claims including reimbursement for overtime, retirement contributions, or social security contributions, amongst other benefits. Make sure you are aware of all your obligations relating to both your employees and your independent contractors.

This has changed dramatically, especially over the past five to ten years as the “gig economy” has taken off and employers are relying more and more on independent contractors instead of employees. While such use can provide a lot of benefits, it also presents a lot of risks and small business lawyers are at the forefront of helping companies mitigate these risks. Fortunately, Practical Law provides a lot of resources to aid in-house lawyers in this responsibility.

These cost savings are a distinct advantage in today’s digital economy and one of the main reasons why the independent contractor movement is expected to include 40% of the U.S. workforce by 2020. If you answered yes to most of these questions in this checklist, then you are likely an independent contractor. However, if you are unsure, it is always best to consult with an attorney or accountant to get expert advice. Let’s say you have paid an independent contractor $600 or more during the course of a year; therefore you will need to fill out a 1099-MISC form and send it to the IRS. This record must be filed with the IRS by the business or individual who made the payment.