Independent Contractor or Company Employee?

If you are a business owner, it is extremely important that you know the difference between employees and independent contractors, especially when it comes to taxes.  For employees, you must withhold income taxes and Social Security/Medicare taxes, as well as pay unemployment tax on their wages.  Conversely, you do not have to withhold or pay any of these taxes for contractors.  Misclassification could result in fines and penalties from the IRS, as well as having to pay the required taxes plus interest.  Additionally, an individual classified as an independent contractor who has been treated as an employee has the right to file a lawsuit to obtain retroactive benefits.

So how can you tell the difference between an employee and an independent contractor?  Ask yourself a few questions about the individual in question.

Do you control how/when the individual performs his or her job?

  • Generally speaking, the more control you have over an individual, the more likely he or she is an employee.  Independent contractors typically choose when and how to do their jobs.  Often, but not always, contractors do not work in-office or on a fixed schedule.

Do you provide the individual with a work space and/or job tools?

  • If the individual in question has a desk and computer with software required to perform his or her job, he or she is most likely an employee.  In such a situation, significant aspects of the individual’s job are being controlled by the employer, and this control is a key difference between contractors and employees.

Do you have a contract with the individual that provides work-related benefits?

  • Benefits such as health insurance, vacation pay, or a retirement plan are typically only offered to employees.  Independent contractors are just that: independent and generally do not receive such benefits.


If, after answering the above questions, you are still unsure about how to classify an individual, you should consult with a tax professional.  Additionally, you may choose to file Form SS-8 with the IRS in order to determine the appropriate classification.

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