Most people have heard of both employees and independent contractors. In fact, the majority of the U.S. workforce falls into one of these two categories. However, many people do not understand the distinction. At a base level, independent contractors operate their own business, usually offering services. On the other hand, employees work for someone else’s business, or under an employer.
The primary difference between the two categories is found in the control an individual has over aspects of their work (such as tax obligations, schedule, benefits, methods, and legal protections). Employees are directed when, where, and how to perform their jobs, while independent contractors can dictate their own methods and schedule. An independent contractor’s schedule may also be directed by a specific client or task they assume. Crucially, employees are provided with the tools necessary to complete a project by their employer or company. Contrastingly, independent contractors work for themselves, meaning they bear the responsibility for acquiring appropriate tools and supplies.
Employees and independent contractors also differ when it comes to payment and taxes. Employees are typically paid a fixed salary or hourly wage by their company or employer. Accordingly, minimum wage and overtime laws apply. Independent contractors, however, are typically paid directly by a consumer per project or service provided. The two categories of workers deal with taxes differently too. Employers withhold income tax and employees receive W-2 forms. Independent contractors, on the other hand, submit invoices before subsequently receiving and completing a form 1099-NEC and paying their own taxes.
Benefits and legal protections also differ for employees and independent contractors. Most employees are eligible for benefits ranging from health insurance to retirement. Independent contractors do not usually receive any benefits. Employees are frequently protected by labor laws too, such as overtime, minimum wage, and workers compensation. Conversely, independent contractors are rarely covered by labor laws.
The differences between employees and independent contractors are significant and so are the consequences for misclassifying them. Misclassification can lead to a host of different issues, including lawsuits, tax problems, and substantial financial penalties. Understanding the distinctions between the two categories can prevent numerous potential problems from arising.
