Employee vs. Independent Contractor:
Differences You Need to Know

You’ve started your business; you have a great product, a fantastic marketing plan, and enormous success in your future. However, before you start hiring on your team of All-Stars, you have to make that one decision that could decide the fate of your brain-child: should you classify them as workers or independent contractors?

Over time, the U.S. government has realized that misclassification of workers can cause massive ramifications to their revenue stream. In the National Employment Law Project done by Coopers and Lybrand, they estimated that the government would lose $34.7 billion from 1996 to 2004. In 2000, the U.S. Department of Labor (in the “Planmatics” study) found that “between 10 to 30 percent of audited employers misclassified workers.” These numbers may not give much pause to the single employer, but the same research tells us that misclassifying even one percent of workers as independent contractors would cost unemployment insurance trust funds $198 million ANNUALLY. It’s a staggering number, and one that gives the government the drive to crack down on these practices.

So what is the difference between an employee and an independent contractor? A worker is a “common law employee” if the employer has the right to control what work will be done, as well as how that work will be done. On the other hand, a worker is a “common law independent contractor” if they are subject to the control of the company only as to what results are to be accomplished, and not as to the details by which those results are accomplished. As an employer, employees are bound to perform the duties you assign in the way you see fit. However, according to a study by the IRS, you can count on employees costing you 20-30% more to hire due to the taxes and insurances that come along with them.

Common Law Test – Employee or Independent Contractor?

Employee

• Required to comply with employer’s instructions about when, where, and how to work
• Works exclusively for the employer
• Hired by the employer
• Subject to dismissal; can quit without liability
• Performs services under the company’s name
• Paid a salary; reimbursed for expenses; participates in company’s fringe benefits program
• If an outside salesperson; company provides leads, sets terms and conditions of the sale, assign a territory, and controls the sales process

Independent Contractor

• Sets own hours; determines own sequence of work
• Can work for multiple employers; services available to the public
• Is self-employed
• Performs services under the worker’s business name
• Payment by the job; opportunity for profit and loss
• Permitted to employ assistants; furnishes own tools, equipment and training. Substantial investment by worker
• Controls the sales process and terms

If you have questions regarding your current classifications contact our certified payroll team for more information.

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