Employee Vs. Independent Contractor: Key Differences Explained

There are distinct legal differences between both roles. With employees, companies withhold Social Security, Medicare and income tax from wages paid. For independent contractors, companies do not withhold taxes. Employment and labor laws do not apply for independent contractors either. So, what are the key differences between an employee vs independent contractor? Read on to find out.

Determining a Difference

A company will determine a difference between an employee and an independent contractor by identifying the degree of control that the company has in its relationship with the worker:

• Can the company control, or do they have the right to control, what the worker does and how they perform their job?
• Is the company in charge of the business aspects of the worker’s job? These include payment arrangements, reimbursing expenses, and providing tools and supplies
• Has a written contract been established between the worker and the company? Will the worker be provided benefits such as insurance, a pension or vacation pay?
• Will the relationship between the worker and the company continue, and is the work performed by the worker integral to the business?

Key Differences

Below are some key differences between employees and independent contractors.

• Employment laws: An employee is covered by various state employment and labor laws both on a federal and state level. An independent contractor is not.
• Hiring practices: For an employee, the hiring process begins with the completion of an application overseen by human resources. If approved, the employee will receive a job offer. Upon acceptance of this offer, the employer is required to ask for additional information such as the employee’s date of birth, marriage status, and citizenship status. Meanwhile, independent contractors interact with the exact person or department that needs a specific service to be completed. The contractor will enter into a contract which includes a Statement of Work.
• Tax documents: An employee must provide their name, social security number, tax filing status, address and number of exemptions on their W-4. Independent contractors are to provide their name, taxpayer identification number, certification about the back-up withholding on their W-9, and their address.
• Payer’s tax reporting requirements: An employee must report all the money paid during the tax year on a W-2, while an independent contractor must report payments totaling $600 or more within a calendar year on a Form 1099
• Other agencies: Employees must also report to the state and federal unemployment insurance, while an independent contractor does not.
• Value of work/contract: An employee earns either an hourly rate or salary, while an independent contractor has a contractor detailing a total amount.
• Receiving payment: Employees will have the same period unless this undergoes a formal change. Should a paycheck not be negotiable on a normal pay date, federal and state law requires that an employee be paid earlier. Independent contractors are paid after their invoice has been received and can refer to their Statement of Work to see when their payments will be made. They are not paid through the employee payroll.

Know Your Rights

Whether you are an employee or an independent contractor, you should know your rights as a California worker. From being forced to work while sick to violating wage and hour laws, employers can have many ways of fleecing their workers. Knowing your rights helps you protect yourself and your co-workers from being exploited.