It’s always exciting landing that new job. Even with an employment contract, you may still be considered to be an independent contractor by the IRS. Sometimes, an employer prefers that you be classified as an independent contractor because its much less expensive for the company.
Whether a worker is an “employee” of the company or an “independent contractor” turns on whether the company has the right of control over the worker in the performance of their work.
There Is No Strict Definition of An Employee
Generally, a worker is an employee if the company has the right to control and direct the worker on the task to be accomplished and how that task will be completed.
An Employment Contract Is Not Determinative
A worker can be hired as an employee with or without an employment contract. Sometimes an employee-at-will, defined as an employee without an employment contract, can be legally determined to have an implied-in-fact contract, depending on the conditions and circumstances of their employment relationship.
Even if a company compensates an independent contractor and an employee for similar work, there are still significant legal and tax distinctions between the two.
Major Difference Between Employee and Independent Contactor
If the worker is an employee, the company is legally obligated to withhold income tax from the worker, contribute to and deduct social security and Medicare from the employee’s wages. Also, the employer can be sued if the company wrongfully terminates an employee or reports them to the labor board.
In most cases, an independent contractor is considered a sole proprietor who is in business for themselves, deducts their own expenses, and pays their own taxes. Independent contractors do not receive employee benefits from the company, such as health insurance and paid leave.
Method of Payment Distinction
Contractors are usually paid by the company’s accounts payable department rather than by an internal or external employee payroll service. The independent contractor is paid after the worker issues an invoice to the company for work performed.
An employee’s pay period remains the same and does not vary from one pay period to the next. The IRS uses twenty factors to determine whether a worker should be legally classified as an employee or an independent contractor.
IRS Audit – Employer Carries the Burden of Proof
The IRS makes its determination on a case-by-case basis. In an audit, the IRS will typically assume that a worker is an employee and force the employer to prove otherwise.
The Twenty Factors Considered:
- An employee must fully comply with the employer’s instructions about when, where, and how company work will be performed. Here the employer asserts its right to control how the work results are achieved.
- The employer usually trains employees so they can perform their tasks in a uniform manner. On the other hand, independent contractors ordinarily use their own methods and practices and do not receive training from those that retain their services.
- An employee’s services are fully integrated into the company’s operations.
- An employee is required to render their personal services – and cannot subcontract their work out to others.
- Employee relationship with an employer is continuous, as contrasted with independent contractors, who typically work on a job-by-job basis.
- Employees are subject to an employer’s fixed set of work hours. An independent contractor normally sets their own hours.
- The employee is required to work full-time and can receive overtime pay. Independent contractors typically may work in phases and at times that work with their schedule.
- Employee work is usually performed on the employer’s premises; independent contractors can work at different places and at different times.
- An independent contractor can choose the order or sequence of the work to be performed.
- An employee’s work is closely monitored and is subject to work performance reviews by the employer. Employer job reviews are another indication of control.
- An employee is generally paid by the hour, week, or month, but an independent contractor is usually paid per job or invoiced work.
- Payment by the employer of the worker’s business expenses is another indication of control. An independent contractor is typically required to bear their own costs and use their own equipment.
- Employees generally are furnished with most of the tools, materials, and other equipment necessary to perform the work functions by the employer. Independent contractors typically supply their tools and materials.
- Independent contractors typically invest significantly in their own equipment and tools of the trade.
- Whereas independent contractors can profit or suffer a loss, employees are typically paid regardless of the company’s profitability.
- Independent contractors are generally free to provide their work to other companies and will not have an exclusive relationship with a single company.
- An independent contractor may work for more than one unrelated party, whereas an employee works for only one company.
- While an employer can fire an at-will employee, terminating an independent contractor can incur potential liability.
- While an employee has the right to quit a job without penalty, an independent contractor is contractually obligated to complete a specific task or job.
Finally, to prevent any unpleasant surprises when you are offered the job, make sure you are clear as to what your employment status will be before you accept the job and begin working for the company.
Consult With an Employment Lawyer
Should you have specific questions or require additional information about your legal rights and obligations, we strongly advise you to consult with a verified Employment-Labor lawyer about your issues as soon as possible.
