Characteristics of independent contractors and employees

Small businesses should understand the important distinction between independent contracts and regular employees.

Independent contractors are common in many occupational industries. As an employer, it is imperative to comprehend the difference between an independent contractor and standard employee. This is because a business may incorrectly believe some of their workers are independent contractors, and the distinction between these occupational statuses can greatly affect an employer's responsibilities and obligations under the law.

For example, an employer will generally pay approximately 40 percent of an employee's earnings toward entitlements and taxes, such as Social Security, unemployment benefits, workers' compensation and varied health and retirement programs. As a result, many companies prefer to hire independent contractors in an effort reduce such financial obligations and diminish business costs.

Yet, it can become much pricier to a company owner when the government auditor determines that an employer has misclassified an employee as an independent contractor. If an employer misclassifies the status of a particular worker, this could lead to serious financial consequences including the following:

  • Wages will be retroactively reported.
  • Taxes will be assessed.
  • Interest will be charged on back pay at 1.5 percent per month or a similar rate.
  • The audit may period may increase.

Further penalties may apply for mischaracterizing, depending on the particular circumstances.

What is the difference between an independent contractor and employee?

To avoid penalties, it is helpful to understand the distinction between an independent contractor and employee. An independent contractor is a person or business unit that has some of the following traits:

  • Is free of another's direction or control
  • Is responsible to the customer for the result of the work (and not the method used to complete the task)
  • Controls how the service is executed or provided
  • Assumes the costs associated with completing the work
  • Provides necessary equipment, tools or skills for the job
  • Pays taxes independently
  • Has no termination rights
  • Is not entitled to overtime

On the other hand, an employee tends to embody some of the following characteristics:

Is directed by the employer

  • Completes tasks in accordance with the employer's wishes
  • Often receives benefits that exceed traditional payment for service
  • May join a union

Of course, these descriptions do not represent all characteristics known to each employment status. Therefore, if you would like to ensure that your business is complying with the law, it helps to retain a lawyer. The obligations associated with misidentifying workers can be detrimental to your business. To learn more, seek the help of an experienced business law attorney.

Keywords: Businesses, employees, independent contractor, worker