top of page

Can You Tell the Difference Between Independent Contractors and Employees?

By Alexandra Loos, SPHR 🔹


Have you considered the legal and financial implications of misclassifying workers as independent contractors or employees for your small business?

Properly classifying workers is a legal necessity and essential for your business's smooth operation and sustainability. Misclassification can result in fines, back taxes, and even lawsuits.

To guide you, I compiled a fact sheet comparing independent contractors and employees based on critical factors such as control, supervision, benefits, taxes, etc.


Comparison of Independent Contractors and Employees Based on Key Factors - Fact Sheet 

INDEPENDENT CONTRACTORS

KEY FACTORS

EMPLOYEES

Independent contractors can control how they do their work. Business is interested only in the results.

CONTROL

Business can control how employees complete their duties (how, when, and where).

Independent contractors work unsupervised.

SUPERVISION

Employees work under extensive supervision.

Independent contractors typically work for multiple businesses at the same time.

EMPLOYER

Employees typically work for one business.

Independent contractors are not trained by business.

TRAINING

Employees are trained by business to do their job in a certain way.

Independent contractors can hire help to perform the work contracted.

WORK

Employees must do the work assigned themselves.

Independent contractors are hired to perform a specific job; the contract ends when that job is finished.

RELATIONSHIP

Employees work with business year after year.

Independent contractors can set their hours.

HOURS OF WORK

Business sets employees’ work schedules.

Independent contractors work away from business site and usually supplies their own office.

OFFICE

Employees must work at business’s office, or another site designated by business.

Independent contractors can choose what order they want to perform tasks necessary to complete a job.

ORDER OF TASKS

Business can set the order in which employees must perform the tasks assigned.

Independent contractors invoice business for work completed and get paid as specified in the agreement.

PAYDAYS

Employees are paid on set dates in regular amounts.

Independent contractors must provide their own tools, work supplies, travel, and business expenses.

EXPENSES

Business pays for employees’ tools, work supplies, travel, and business expenses.

Independent contractors are not eligible for company-sponsored benefits. They must arrange their own health insurance and retirement plans.

COMPANY SPONSORED BENEFITS

Employees are eligible for company-sponsored benefits such as medical insurance, retirement plans, vacations, and holiday pay.

Independent contractors are not eligible for unemployment benefits or worker’s compensation.

GOVERNMENT BENEFITS

Employees are eligible for unemployment benefits or worker’s compensation.

Independent contractors have no deductions withheld from the invoice payment they provide and need to pay quarterly taxes independently to avoid end-of-year penalties.

TAXES

Employees have payroll local, state, and federal taxes withheld from their paycheck, along with Social Security and Medicare deductions.

As the Department of Labor outlines, independent contractors are not eligible for overtime pay.

OVERTIME PAY

Employees could be eligible to receive overtime pay depending on the job function or hours worked.

Independent contractors must provide a filled-out Form W-9 to the business.

TAX DOCUMENTATION

Employees fill out a Form W-4, and some states require additional withholding forms.

Business reports payments of $600 or more in a calendar year using a Form 1099-NEC—unless independent contractors have a corporate business structure, in which case the 1099-NEC is not required.

TAX REPORTING

Business reports the compensation paid to employees during the calendar year using a Form W-2.


How Can Cove Help?

Cove members are encouraged to ask any questions about hiring independent contractors and employees on the private community feed. In Cove, a private community for small business owners, you will find a wealth of shared experiences and valuable advice to guide you through these complex issues.


Additional Resources 


Disclaimer

This fact sheet offers general information about employment rights in the United States. However, laws may change, and interpretations may vary. Consult a legal counsel or the relevant agency for up-to-date guidance tailored to your specific situation.

Understanding the distinctions and ensuring proper classification will safeguard your business and create a compliant, equitable working environment.


About the Author

Alexandra Loos co-founded Cove.eco, an online community for small business owners, in 2023. She holds a certification as a Senior Professional in Human Resources (SPHR). She owns Scalable Business Hub and provides virtual accounting and business solutions to small businesses and startups.


Cove.eco Business Community - Can You Tell the Difference Between Independent Contractors and Employees?

Comentarios


Los comentarios se han desactivado.

How to File the BOI Report (BOIR)

This free mini-course provides the filing steps for US-based companies (including small businesses) that existed before January 1, 2024.

bottom of page