(US employment law and generally) Quite a bit of confusion exists about the differences between an employee and an independent contractor. Some people may be independent contractors and not realize that they are classified as such. Other workers may think they are independent contractors but find that they are employees. To avoid confusion and owed taxes, one must determine his or her classification as quickly as possible. Filing the right income tax forms is extremely important. The following are the major differences between employees and independent contractors:
An employee is someone who is employed by a company or entity. This person typically works full-time hours and the company supplies the individual with the tools necessary to do his or her job. An example is a cell phone salesperson. The company provides the computer, phones, paperwork, pens, sticky notes, and other materials that the employee needs to make his or her job easier.
An employee must operate based on the employer’s rules, regulations, and code of conduct. This person may not go against the policy or create new ones. The employer has complete and utter control over what the employee wears, how he or she does the job, and the time span in which he or she does it. If the worker has to answer to a boss who controls how things are done, then the worker will mostly like be classified as an employee.
An employee will pay social security taxes and Medicare taxes. This person will also receive a weekly or biweekly pay check. The employer pays this person an hourly rate or a regular salary for his or her services. There may or may not be a contract. However, there will be some kind of understanding that there is a business relationship that exists between the two parties.
When it comes times to file income taxes, an employee will receive a W-2 statement from his or her employer. The W-2 will state the person’s yearly income and the taxes that were taken out from the pay checks. The worker must use this information to complete a 1040 tax form. Independent contractors do not receive W-2 form.
An independent contractor is someone who is self-employed. This person performs work for other businesses, but he or she is technically a business as well. An example of an independent contractor is a cleaning person that performs janitorial duties for various restaurants. The cleaning person gets paid for each specific job instead of on a weekly basis. The restaurant owners do not pay the cleaning person a weekly pay check and they do not take taxes out before they pay this person.
If the cleaning person brings his or her own supplies to the job and does not have anything supplied by the restaurant owner, that person is probably an independent contractor. Likewise, if the restaurant owner never interferes with how the cleaner is doing the job, then the cleaner is an independent contractor.
Independent contractors are responsible for keeping track of what they make and reporting it properly when it is tax time. Some businesses will send form 1099, which is a statement of the earnings the independent contractor made through the year. The contractor can then use this figure to add up the total profits from the previous year.
There are advantages and disadvantages to being an independent contractor. The good part is that independent contractors are their own bosses. They make their own schedule and they conduct business the way they like. Independent contractors do not have employer paid health benefits, but may be able to seek healthcare coverage elsewhere.
About the author
This piece was composed by Hank Vitter, a freelance writer based in Denver, Colorado. Hank writes on business, taxation, finance, employment trends and other related matters; to learn more about taxation, visit R&G Brenner for important IRS tax tips.