Robert J. Fedor, Esq., L.L.C.

What's the difference between an employee and independent contractor?

The goal of many small business owners is to grow their business and business capabilities. In many cases, business owners who are successful in achieving this goal must hire individuals to assist with a variety of business-related matters. Upon hiring someone, business owners must take steps to correctly classify a worker as either an employee or independent contractor.

For a small business owner, designating a worker as an employee or independent contractor has significant and varying tax obligations and implications. While the IRS doesn't offer any hard and fast rules about how to classify an employee, it does provide basic guidelines that must be considered and taken into account by an employer.

Generally, a worker should be classified as an employee if an employer "can control what will be done and how it will be done." While this statement seems straightforward enough, at times, factors related to a worker's responsibilities and an employer's ability to influence or control the work that is done may be contradictory and confusing.

On its website, the IRS lists so-called common law rules related to an employer and employee relationship. For example, classified employees may receive health and retirement benefits through an employer. Additionally, an employer may have the power to decide if an employee is exempt or non-exempt and provide an employee with specific job training.

When an individual is officially classified as an employee, a business owner is responsible for withholding and paying taxes related to income, Medicare, Social Security and unemployment. In cases where an individual is classified as an independent contractor, the individual is considered to be self-employed and therefore assumes these tax obligations.

Small business owners who misclassify employees as independent contractors may face fines, penalties and even criminal charges. To aid employers in correcting employee misclassification errors, the IRS recently instituted a Voluntary Classification Settlement Program through which eligible employers may be able to obtain "relief from federal employment taxes" and correctly reclassify workers.

Source: IRS, "Independent Contractor (Self-Employed) or Employee?," 2014

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