Business Management: Employee Versus Independent Contractor

Businesses must know which sort of person they are dealing with who is performing the services for them. In fact, there are as many as four different classes for workers, including independent contractors, statutory employees, statutory non-employee, and a common-law employee. But in terms of knowing how to treat payments and taxes for the different forms of workers, it is the employees and the independent contractors which must be treated very differently.

An employee is a worker with whom you have a great deal of control over. In essence, a business should consider a worker an employee when the business has control over what will be done and how it will be done. Employees are subject to their income tax, Social Security and Medical taxes, and unemployment taxes being withheld from their paychecks. Also, employees must be categorized as such by the business on their forms.

An independent contractor has a great deal of independence in relation to the business than an employee does. The business, with an independent contractor, only has the right to control the result of the work being done by the worker. The business basically says what they need, and the independent contractor is the person who discerns the how it will be done aspect. Independent contractors who are paid more than $600 in a year must be reported on a 1099-MISC form. They are filed as miscellaneous income.

Failure to classify a worker properly can result in heavy employment taxes, fees, and potential audits against the business. For this reason, it is very important for businesses to be conscious of who they have working for them and to think carefully about how they classify those workers. It is critical not to classify an employee as a independent contractor, whether intentionally or by mistake, so as to avoid the potential fines.

If your business does become audited, there are some important things to know.