Employee Vs Independent Contractor

Every business may hire workers as independent contractors or as employees. There are rules that help you determine how to classify the people you hire, whether you need to withhold taxes from your workers paychecks, how much you pay in taxes, and what tax documents you need to file.

What is the difference between an employee and an independent contractor (self-employed worker)? There are things every business owner should know about hiring people as independent contractors versus hiring them as employees.

The degree of control the employer has over the worker primarily determines the relationship between businesses and workers; whether or not the worker is an employee or an independent contractor.

Employee
  • The employer has the right to control what must be done and how it must be done.
  • The employer supplies the tools to complete the work.
  • The worker is an employee who works, usually exclusively, for the employer.

Independent Contractor
  • Self-employed workers control how the work is to be done. The employer can control only the result of the work done.
  • Self-employed workers usually provide their own tools.
  • The worker is self-employed and has an independent business serving multiple clients.

Employers who misclassify employees as independent contractors can end up with substantial tax bills. In addition, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

Workers can avoid higher tax bills and lost benefits if they know their proper status.