Are you a business owner with workers that don’t clock in? Or maybe they do but you don’t withhold taxes from their earnings. Do they provide you with an invoice for work/hours completed each week/project/task?
These are essential questions that you should know if you are trying to classify the difference between an employee and an independent contractor for anyone that works for you.
But, what is the difference, actually? Let’s take a look.
The Cut and Dry Definition of an Employee vs. Contractor
An employee is an individual that is lawfully employed by your company. For example, you will determine the role of the individual including daily workloads, hours required, shifts, vacation time, and rate of pay.
An independent contractor, on the other hand, is an individual that works for him or her self and serves your company via contractual work. For example, any type of freelance worker is an independent contractor.
How the IRS Categorizes the Difference Between an Employee vs Independent Contractor
It can be difficult to understand how to classify your workers without a little help from good ole Uncle Sam. Here are some outlines the IRS provides to help you and your worker define their role.
A worker that receives little or no training and sets their own hours, is likely an independent contractor. An employee is someone that trains on the job, receives specific tasks to be performed, etc.
If you are paying your worker a salary, this individual is not permitted to work for other companies under the same role and therefore can be classified as an employee. An independent contractor may work for several companies and be paid per hour or project, however, does not participate in company profits and losses.
Type of Relationship
If you have a contract with your worker that is entitled to benefits, this individual may be an employee. If the individual does work directly related to the company’s core work, they should be considered an employee.
Taxes and a Contractor vs Employee
It’s important to choose the right paystub generator when you pay an employee vs. a contractor. Contractors do not require taxes to be withheld and therefore, will receive a 1099 in lieu of a W-2.
Knowing the Difference Between an Employee and an Independent Contractor is Essential for Payroll Purposes
The main difference between an employee and an independent contractor is the classification for payroll purposes. If you don’t know how to classify your workers, you could be in a world of trouble come tax season. And so could your workers.
Help each other out and make sure you are all on the same page to ensure that finances on both sides of the books are properly maintained.
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