When is an Independent Contractor Really an Employee?

By MBO Partners | July 26, 2022

Share
Smiling,Indian,Business,Man,Hr,Employer,,Teacher,Or,Lawyer,Holding

Key Points

Independent contractors are their own business entity. They may perform work for multiple clients, and are free to choose when, where, and how they work.

Independent professionals bring companies substantial financial benefits including access to in-demand skills in a competitive talent market and the ability to flexibly staff timely project needs. 

There are many different federal- and state-level tests that provide guidelines for determining whether a worker is an independent contractor, and these tests can contradict one another and can be understood in different ways. 

What is an Independent Contractor vs. Employee?

These definitions will help you understand how each type of worker is defined:

Employee

A full-time employee works for a single employer and that employer has a say over the work they do and how that work gets done. An employer can control the hours, location, and type of work an employee is responsible for. Employees are also entitled to benefits, which may include health insurance, stock options, or 401(k) matching. 

Independent Contractor

Independent contractors are their own business entity. They may perform work for multiple clients, and are free to choose when, where, and how they work. The work they are responsible for is typically outlined in a contract, and they generally provide their own tools, training, and equipment. They are not entitled to company or legal benefits like a full-time employee. 

Up next: Contractors vs Employees: 10 Differences You Need to Know 

What are the differences between Independent Contractors and Employees?

There are many key differences between independent contractors and employees. These differences are important to understand, especially if your company is considering engaging independent talent.  

Today, organizations have many different approaches to building their workforce. Traditionally, businesses relied on a base of full-time employees, perhaps supplemented by temporary workers to fill seasonal or short-term needs.  

In recent years, however, companies are increasingly incorporating independent contractors into their talent strategies. And no wonder—independent professionals bring substantial financial benefits including access to in-demand skills in a competitive talent market and the ability to flexibly staff timely project needs. 

Yet there are specific rules and regulations that dictate how to properly classify independents. If you engage someone as an independent contractor, but this person should be classified as a full-time employee in the eyes of the IRS or applicable state laws, your company may be at risk of misclassification. Regardless of whether misclassification is intentional, it puts companies at risk of owing back taxes, benefits, and penalties to misclassified workers. 

Check out: 5 Reasons to Hire Independent Contractors 

Worker Classification

Correctly classifying workers as either traditional employees, who receive a W-2 Wage and Tax Statement, or independent contractors, who receive form 1099-MISC, Miscellaneous Income, is far from simple.  

There are many different federal- and state-level tests that provide guidelines for determining whether a worker is an independent contractor, and these tests can contradict one another and can be understood in different ways. 

As more companies shift towards using independent talent, interpretation of these laws, tests, and guidance continues to evolve. 

In order to avoid the consequences of worker misclassification, it is important to:  

  • Be aware of federal, state, and local government laws surrounding classification 
  • Understand how independent contractors differ from employees and treat them accordingly 
  • Always use a written contract  

Even with these provisions in mind, ensuring independent contractors are correctly classified is not a straightforward or simple task. 

To minimize the risk of misclassification, many companies choose to partner with a firm that has experience in helping other organizations compliantly engage independent talent and can indemnify against misclassification and legal risk. 

Check out: Risk management solutions from MBO 

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.   

Compliance CTA

Related Posts

Independent Contractor Misclassification and Compliance News January 2024

As the independent workforce continues to grow, so do the issues of worker compliance and misclassification. It is important for enterprises to remain informed about the latest laws, regulations, and developments surrounding these topics. Each month, we’ll bring you the latest news stories from around the web. U.S. Department of Labor Announces New Worker Classification…

Read More...

3 Ways to Ensure Success When Engaging Independent Contractors

Growing demand, enabling technology, and expanding supply are three key factors leading to the continuing growth of the independent workforce in America today. In 2023, just over 72 million people reported working independently. As more organizations incorporate independent talent as part of their workforce, it becomes increasingly important to be aware of the legal complexities…

Read More...

How to Ensure Compliance for Non-Traditional Independent Workers

As the way work gets done changes and companies continue to seek high-demand and often specialized skills, hiring managers are tapping workers from non-traditional talent pools. The most notable of these are digital nomads and members of the creator economy.   Engaging Digital Nomads Requires Extra Attention  While independent professionals pursuing a digital nomad work style…

Read More...
Trending
Tags

Concerned about compliance?

Get our misclassification guide and learn
how to lower your risk

ACCESS THE GUIDE

Learn more about the MBO Platform

FOR INDEPENDENT
PROFESSIONALS

Start, run, and grow

your independent business with MBO

FOR
ENTERPRISES

Engage, scale, and optimize

your independent workforce