While there can be some variation in your final bill, most of the time you know what to expect. About 3.4 million staff members in the U.S. are erroneously being classified as independent contractors when they should be listed as employees. Part of the issue is that many businesses don’t understand the difference between contractor vs. employee. But under a new rule that takes effect March 11, practices that are making this mistake could face up to a year in jail.
Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee, https://www.bookstime.com/articles/accountant-for-independent-contractors the business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.
Independent Contractor vs. Employee: Definitions and Characteristics
The company could be liable for employment taxes, back wages , unemployment insurance claims, workers compensation claims, violations of the FMLA, claims involving benefits, and more. You have to withhold, report, and remit an employees income tax withholding, Social Security and Medicare taxes, as well as pay unemployment taxes to your state labor regulator. Generally, you must withhold and deposit income taxes, social security taxes and Medicare taxes from the wages paid to an employee. Additionally, you must also pay the matching employer portion of social security and Medicare taxes as well as pay unemployment tax on wages paid to an employee. Generally, you do not have to withhold or pay any taxes on payments to independent contractors.
- Beyond just their day-to-day tasks, employees often become an integral part of the organization’s culture and its long-term vision.
- Contractors often go from one company to another in a short space of time, or work part-time for two or more companies simultaneously.
- The IRS and many states have adopted common law principles to define an independent contractor.
- This section will dive into the advantages and disadvantages of being classified as an independent contractor.
- While the actual cost of payroll taxes will vary, it’s important to note that running payroll and remitting those taxes is a complicated process.
- But if you can pull it off, you might feel happier working as a contractor versus an employee.
A sometimes difficult status to define, what makes an independent contractor has been outlined by common law principles, the Fair Labor Standards Act, and finally the decisions of some courts. Ultimately, the decision between independent contractor and employee status is highly individualized. It hinges on your work preferences, financial aspirations, career objectives, and risk tolerance. As the professional landscape continues to evolve, so should your evaluation of these factors to ensure that your chosen work status aligns with your evolving needs and goals.
Contractor vs. Employee: How to Differentiate and Why It Matters
Your tasks are also likely oriented toward your company’s long-term strategic plan. The most successful contractors have specialized skills that suit short-term projects. Clients hire them to complete a job, they agree to a fee and deadline, and the contractor completes the work based on the agreement. Once the project is done, independent contractor vs employee the relationship ends, unless another opportunity to work together comes up. Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.
