Independent Contractor or Employee?




You're looking at hiring someone, but you aren't sure if you they fall under an independent contractor or an employee. Or you may have a client who wants to hire you to do a job and you are unsure if their description falls into the employee category. So first things first, does this really make that big of a difference? The answer is yes! The IRS has been cracking down on employers who are incorrectly categorizing their workers in an attempt to avoid paying taxes and incorrectly categorizing your employees can get you into a boatload of trouble.


Let's talk about the differences between the two roles for tax purposes. Independent contractors are typically paid by a company with no tax withholdings taken from their paychecks. The company is not responsible for paying into employment taxes such as social security. The independent contractor is required to make those payments and also pays self employment taxes. This increases the contractor's tax payments because they are responsible for the taxes the employer normally pays. An employee on the other hand has taxes withheld from their paycheck, but is also not subject to self-employment taxes, instead this is an additional payment the employer makes to the government. There may also be an increased liability taken on by the employer when hiring employees versus independent contractors, but that is best left for a discussion with an attorney as this could vary.


Characteristics of an Employee

Generally an employee has at least one of the following characteristics:


The employer supplies the tools for the employee to complete the job. This could range from providing software, a computer, a machine, work bench, etc.


The employer dictates how the employee is to do the job. And independent contractor is going to more or less receive instructions on what the final product should be, but the method to get there will be up to the contractor. An employee on the other hand may have the method of completing their job dictated to them.


The employer provides training to the employee. Again, this points to an employer having control over the methods an employee uses to complete a job rather than hiring an independent contractor for a specific result.


An employee is likely to have any costs related to doing their job reimbursed. For example, an employer may reimburse an employee for gas, software costs, etc. An independent contractor is more likely to be expected to absorb these costs as part of the cost of doing business. These can be thought of as business expenses for the independent contractor.


An employee may not be eligible to take on outside work where as an independent contractor will not have restrictions put on their business activities by a client. For example, as part of their employment agreement an employee may agree that they will not take on any outside consulting jobs. An independent contractor hired to complete a job for someone is not restricted by that contract from bidding on another job.


An employee is not likely to be paid by each job, rather they most likely have a set amount per hour or a salary set regardless of the number of projects completed. Independent contractors are often only hired for specific jobs, once that job is complete the working relationship is not reasonably expected to continue unless the independent contractor is hired for another specific job. An employee on the other hand is more likely to be able to reasonably assume that they will continue their working relationship even after a project is completed.


If an employer is offering benefits as compensation the position is most likely one of an employee. Independent contractors are unlikely to receive benefits from a client.


It is important to note that a contract stating a working relationship is that of an independent contractor or that of an employee/employer is not substantial enough to define a relationship one way or the other. The actual characteristics of the relationship can cause the IRS to override a contract and could cause an employer to be liable for employment taxes on a mis-categorized employee.


For more information visit this page on the IRS website:

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee




Let's talk about the differences between the two roles for tax purposes. Independent contractors are typically paid by a company with no tax withholdings taken from their paychecks. The company is not responsible for paying into employment taxes such as social security. The independent contractor is required to make those payments and also pays self employment taxes. This increases the contractor's tax payments because they are responsible for the taxes the employer normally pays. An employee on the other hand has taxes withheld from their paycheck, but is also not subject to self-employment taxes, instead this is an additional payment the employer Want to add a caption to this image? Click the Settings icon. makes to the government. There may also be an increased liability taken on by the employer when hiring employees versus independent contractors, but that is best left for a discussion with an attorney as this could



614-526-9354

Whitney@MariettiAccountingServices.com

Dublin, OH 43017

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We do not provide assurance services and therefore do not meet the definition of a public accounting firm in the state of Ohio.

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