Independent Contractor vs Employee
As more companies enlist the help of independent contractors, it’s increasingly important that both companies and contractors properly define their roles. Without a clear understanding and firm boundaries, it’s easy to run into a misclassification problem.
The IRS developed guidelines that outline a person’s status as an independent contractor, bringing transparency to a complex issue. These details help prevent a company from treating an independent contractor as an employee or vise versa. We broke down their detailed guide into a brief summary with 10 questions to help you navigate potential misclassification:
Behavioral Control:
An employer exercises control over every facet of an employee’s work: how they work, where they work, and what tools they need to use. But if a business builds a relationship with an independent contractor, they may dictate the end results, but they should never influence the process.
Contractors exercise the flexibility conduct work on their own terms. The IRS suggests a quick rule of thumb for independent contractors: if a company requires a rigorous training process, chances you are in danger of misclassification.
Financial Control:
Independent contractors exert financial control over their businesses by investing in equipment, paying for ongoing costs, and taking multiple clients or customers. As a freelance writer, for example, I purchased my computer, pay for Internet, and work with a full roster of clients.
Unlike employees, contractors should always exercise the right to provide their service to numerous organizations. Unfortunately, some companies ask independent contractors to sign the same non-disclosure forms as their employees. Make sure you don’t overlook these details, accidentally limiting your ability to work with competitors in the future.
Nature the Relationship:
Traditionally, independent contractors work for definite periods of time through a contract without benefits. If you’re unsure whether you may be filling the role of an employee, consider the duration of your work together. Independent contractors who contribute to a single company on an ongoing basis are most in danger of misclassification.
To clarify the role, check out these questions. The more times you answer “yes” to the questions listed below, the less likely that misclassification is at risk:
- Does the independent contractor receive flexibility within the parameters of a project?
- Does the independent contractor control how and when they complete work?
- Does the independent contractor’s clients evaluate work based on the final outcome?
- Does the independent contractor choose and pay for their own tools?
- Does the independent contractor manage ongoing costs associated with their services?
- Does the independent contractor exercise the right to work with multiple companies?
- Does the independent contractor have a written contract that specifies the terms of the agreement? If so, does it specify their role as an independent contractor?
- Does the independent contractor pay for their own benefits?
- Does the independent contractor pay self-employment taxes?
- Is there an end date associated with their work?
If you think you’re in danger of misclassification based on these ten questions, do some more research. As an independent contractor, you can always alter certain aspects of your client relationships to bring consistent boundaries to working agreements. As a company working with a contractor, you can also make sure you are working with contractors within bounds of these guidelines.
