Contractors and employees sound like they may be interchangeable terms but the fact is they’re very different. Understanding the difference between the two can save you a lot of money and headaches. If you own a small business or planning a small home renovation project, there are a few things to be aware of.
What is the difference between an employee and a contractor?
The IRS considers an individual a contractor if the payer controls or directs only the result of the work, not what and how it’s done.
By contrast, a worker is someone in which “the business has the right to direct and control the work performed.”
A few separate factors are also considered when determining the difference between an employee and a contractor. The IRS generally defines an employee based on these guidelines:
Behavioral Control – If the business has a right to control the work performed based on instructions, evaluations, and training.
Financial Control – if the business has control in the financial aspects of the job such as equipment, reimbursements, etc
Relationship – how the worker and business perceive their interaction with one another with respect to contracts, benefits, vacation, pensions, etc
Every year millions of contractors are misclassified as employees and vice versa. A contractor will generally receive a 1099-MISC form that reflects their income from a particular job. A contractor is not subject to the same withholdings as an employee. Qualifying them as such can be a costly mistake for the contractor. On the flipside, not withholding taxes or other disbursements from an employee can be costly to them if they’re unaware.
Are There Consequences For Misclassifying An Employee Or Contractor?
Classifying an employee as an independent contractor incorrectly causes employers to be liable for employment taxes.
If a worker feels that an employer has incorrectly classified them, they have recourse. They can file Form 8919 to determine the employees share of any uncollected Social Security and Medicare taxes due.
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