Independent Contractor vs. Employee

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 4,036 reviews

Jump to Section

Need help with an Employment Contract?

Post Project Now

Independent Contractor vs. Employee: What’s the Difference?

The difference between an Independent Contractor vs. Employee is an important issue for employers to understand. Beyond legal headaches and potential issues with the IRS, it can actually have a big impact on tax liability and other obligations.

Classifying Workers

Workers can be classified in many ways, including employees or independent contractors. This distinction may sound simple at first, but it can be complicated when the relationship between the employer and the worker is a borderline case.

In other words, an independent contractor agreement may have all the necessary requirements to be classify the relationship as such, but some features may point to the relationship being an employer-employee relationship.

And the distinction isn’t only in name. The classification of the relationship forms the foundation of the reciprocal rights and obligations of the employee and the worker. Besides, the distinction between the two is also important when it comes to the employer’s tax liability.

Employees and Independent Contractors – How They Are Defined?

Independent contractors are professionals or workers in a trade or business that offer their expertise or service to the general public. They are typically contracted to perform work by an employer and are not considered an employee.

This may include professions like freelance software developers, writers, and also professionals that work under a consulting agreement or independent contractor agreement .

Employees are people who work for an employer that controls what the employee does. In other words, the employer controls the how, where, and when the employee performs its work.

At will employment is the usual form of employment, with an exception being Montana. This means employees are free to quit or can be terminated at any time as long as it’s legal.

Although these are very general definitions, there are some pertinent difference between employees and independent contractors.

ContractsCounsel Independent Contractor vs. Employee

Image via Pexels by fauxels

What Is the Difference Between an Employee and an Independent Contractor?

  • Employment. As stated before, most employees work at will which means their employer can terminate the relationship at any time or they can quit. They work for the employer’s business and only for the employer. In contrast, independent contractors are self-employed, and they typically work with multiple clients.
  • Payment. Employees are paid a fixed salary or wage, typically on a weekly or monthly basis. Independent contractors work for a predetermined or agreed hourly or project rate. Depending on the agreement, they submit invoices for payment after the completion of a project or certain milestones.
  • Control. Independent contractors work without oversight from the employer. In other words, they determine their own schedule and work hours and often use their own tools in their projects. Employees typically work the hours and at the location dictated by the employer.
  • Taxes. Independent contractors are liable for their own taxes and tax is not withheld from any of their payments. With employees, the employer is responsible for deducting taxes from their wage or salary.
  • Benefits. Employees receive benefits as part of their remuneration package from their employer. In this case, the employer is also responsible for unemployment benefits. In contrast, independent contractors typically do not receive benefits from their employer.

Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

IRS Test for Worker Status

Although these differences are quite clear, there are many situations that can become grey areas between the requirements for either an employee-employer relationship and those of an independent contractor.

A good starting place could be to look at if the employment falls under one of the different types of employment contracts. For example, is it a full-time employment contract or a part-time contract? Does the contract fall squarely under an independent contractor agreement? Does it contain a noncompete agreement? These are all important questions to ask but can also complicate things.

Although there is no one-size-fits-all approach to classifying workers, there are some guidelines the IRS uses to decide what category a worker fits in.

Using these guidelines, the IRS has set up three general criteria :

  • Behavioral control. If the worker works under the control of the employer and the employer dictates the work hours, what tools the worker should use, and how the work should be done, that worker will most likely be classified as an employee. If the worker can set their own hours, use their own tools, and works with little or no control by the employer, that worker is probably an independent contractor.
  • Financial control. If the worker is paid a fixed hourly, weekly, or monthly wage and the employer deducts taxes from their payments, the worker is likely an employee. If the worker invoices the employer, their payment terms vary, and no tax is deducted from their payments, the worker is probably an independent contractor.
  • Relationship. Employees are expected to do work that is essential to the business. In other words, if the work is related to the employer’s core work, the worker is probably an employee. In contrast, independent contractors do specialized work that employers may need from time to time.
  • Taxes. Independent contractors are liable for their own taxes and tax is not withheld from any of their payments. With employees, the employer is responsible for deducting taxes from their wage or salary.
  • Benefits. Employees receive benefits as part of their remuneration package from their employer. In this case, the employer is also responsible for unemployment benefits. In contrast, independent contractors typically do not receive benefits from their employer.

Consequences of Misclassifying a Worker

When hiring an employee, the employer is responsible to withhold income, Social Security, and Medicare taxes from the employee’s salary. The employer must also pay half the Social Security and Medicare taxes due by the employee, workers’ compensation, and unemployment insurance for the employee.

Apart from these, the employer is also responsible for a variety of other requirements depending on the relevant federal and state laws, like overtime, family leave, and sick leave. With independent contractors, there are no such requirements, and the employer is only responsible for the payment of the contractor’s invoices.

So, with hiring an independent contractor being easier than hiring an employee, it’s easy to see why many businesses would want to classify a worker as an independent contractor. And this is where a misclassification can happen.

Regardless of whether a misclassification was intentional or unintentional, it could lead to serious legal and financial consequences. This can lead to reimbursement of unpaid wages, paying arrear workers’ compensation, retirement benefits, and other employee benefits.

It could also include the payment of back taxes, Medicare and Social Security contributions, and other penalties for state and federal taxes. In serious cases, it can even lead to a federal lawsuit.

In simple terms, employers should classify their employees correctly from the start.

Getting Worker Status Determination

The above guidelines can simplify the process of classifying a worker correctly. However, sometimes it can be difficult to classify a worker. The important thing to remember is that, when there’s any doubt, the IRS generally assumes that a worker is an employee.

So, it’s always better to get certainty to avoid any of the consequences of misclassification. This can be done by filing a Form SS-8 to request a determination from the IRS. Keep in mind that the IRS doesn’t issue determinations based on hypothetical situations, but only to resolve federal tax matters.

How Employees and Independent Contractors Pay Taxes

As mentioned, employees are paid either an hourly, weekly, or monthly wage. They could also be paid commission and, in some circumstances, overtime. Employees are taxed on this income and will receive a W-2 form indication their annual income. The employer is responsible to deduct federal and state taxes as well as Social Security and Medicare taxes from their income. The employer is also responsible to pay half of the Social Security and Medicare taxes.

When it comes to independent contractors, there is no responsibility to withhold any taxes. The independent contractor is responsible for reporting and paying their taxes. As from 2020, the only responsibility is to send each independent contractor an annual 1099-NEC form if the employer has paid the contractor more than $600 during the year.

If you have any questions about employee classification or the different between an employee and independent contractor, it is best to consult a highly trained employment lawyer for guidance.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

Charlton M. on ContractsCounsel
View Charlton
5.0 (6)
Member Since:
September 19, 2022

Charlton M.

Free Consultation
Get Free Proposal
Dallas, TX
9 Yrs Experience
Licensed in TX
University of St. Thomas School of Law

Charlton Messer helps businesses and their owners with general counsel and contract drafting services. He has helped over 500 businesses with their legal needs across a variety of industries in nearly a decade of practice.

Justin K. on ContractsCounsel
View Justin
5.0 (3)
Member Since:
September 22, 2022

Justin K.

Freelance Attorney
Free Consultation
Get Free Proposal
Valencia, CA
20 Yrs Experience
Licensed in CA
University of Southern California School of Law

I have been practicing law exclusively in the areas of business and real estate transactions since joining the profession in 2003. I began my career in the Corporate/Finance department of Sidley's Los Angeles office. I am presently a solo practitioner/freelancer, and service both business- and attorney-clients in those roles.

Max L. on ContractsCounsel
View Max
Member Since:
September 19, 2022

Max L.

Free Consultation
Get Free Proposal
Fort Lauderdale, Florida
17 Yrs Experience
Licensed in FL
The Benjamin N. Cardozo School of Law

Hi there. My practice focuses on several aspects of business law, including business entity formation and organizational documents, trademark and copyright, tax disputes, and contracts. I work with quite a few creative entrepreneurs, such as photographers, artists, and musicians.

Erdal T. on ContractsCounsel
View Erdal
Member Since:
September 15, 2022

Erdal T.

Owner, CEO and Managing Attorney
Free Consultation
Get Free Proposal
New Jersey
17 Yrs Experience
Licensed in NJ, NY
New York Law School

Erdal Turnacioglu of Erdal Employment Law focuses on providing employment solutions to both employees and businesses, whether through litigation, review of employee handbooks, workplace investigations, or training seminars.

Dan "Dragan" I. on ContractsCounsel
View Dan "Dragan"
Member Since:
September 21, 2022

Dan "Dragan" I.

Managing Attorney
Free Consultation
Get Free Proposal
Chicago, Illinois
24 Yrs Experience
Licensed in IL
University of Illinois College of Law

I received a bachelor’s degree in philosophy from Northwestern University in 1996 and then got my JD at University of Illinois College of Law where in 1999. I have been a lawyer helping people with legal issues in the United States and Internationally since then. I am currently licensed and authorized to practice before the Illinois courts and the United States’ District Court for the Northern District of Illinois. Internationally I am one of a select few American attorneys licensed and authorized to practice before the United Nations ICTY/IRMCT, the International Criminal Court, and the State Court of Bosnia-Herzegovina. Clients have retained me internationally to alongside local counsel in several European countries, as well as Australia and Africa in private legal matters. I also have been appointed by the United Nations to represent persons at the ICTY/IRMCT in addition to being chosen by indigent accused to represent them. Since 2009 my own law firm has handled domestic and international cases, including Trial litigation (including Commercial, Premises Liability, Personal Injury, Criminal Defense, and General Litigation), as well as Transactional work (Contracts, Corporate formation, and Real Estate Transactions). I have been honored for my work by my peers who voted for me, and I served as President of the ADC-ICT (the Official Bar Association of Practitioners before the UN ICTY and UN IRMCT in The Hague) previously, and now am serving a term on the Executive Board. I also am elected to serve key roles in the ICCBA (that is the bar association at the International Criminal Court in The Hague). I enjoy helping less experienced practitioners and students evolve and improve. I served as an instructor/lecturer on Oral Advocacy and Trial Practice for the participants of the ADC-ICT & ICLB Mock Trial since 2014, and has presented Advocacy Training lectures for the ADC-ICT on several topics as well as regularly lecturing to visiting University and Bar groups from around the world. If you or a loved one have a legal matter of importance, let's see if I can help you with it!

Tina T. on ContractsCounsel
View Tina
Member Since:
October 1, 2022

Tina T.

Free Consultation
Get Free Proposal
New Mexico
1 Yr Experience
Licensed in NM
Arizona Summit Law School

I am a New Mexico licensed attorney with many years of world experience in real estate, transactional law, social security disability law, immigration law, consumer law, and estate planning.

Brent W. on ContractsCounsel
View Brent
Member Since:
December 27, 2022

Brent W.

Free Consultation
Get Free Proposal
Atlanta, GA
16 Yrs Experience
Licensed in GA
Cumberland School of Law

Brent has been in practice since 2007 and been the principal attorney and owner of The Walker Firm, LLC since 2014. Brent focuses on providing an array of general counsel services to individuals and companies in a variety of industries.

Sarah S. on ContractsCounsel
View Sarah
Member Since:
September 22, 2022

Sarah S.

Free Consultation
Get Free Proposal
3 Yrs Experience
Licensed in OK
University of Tulsa College of Law

I have a background in Criminal Law, Family Law, Contract Law, and Environmental Law. I also have five (5) degrees in the following: Here are my degrees and background: 1) B.S. in Environmental, Soil, and Water Sciences 2) A.S. in Pre-Medical Sciences (anatomy, physiology, medical terminology) 3) A.S. in Aircraft Non-Destructive Inspection (science of x-rays, cracks in metal, liquid penetrant, magnetic particle inspections, ultrasonic inspections, and spectrophotometric oil analysis) 4) Master's in Natural Resources Law Studies (1 year focus in the environmental and pollution laws (Hazardous Waste Laws such as RCRA, CERCLA, FIFRA, Natural Resource laws such as ESA, CWA, CAA, FWPCA, Environmental Law, Sustainable Development, and Global Climate Change issues) 5) Juris Doctor and certificate in Native American Law

James G. on ContractsCounsel
View James
Member Since:
September 22, 2022

James G.

Free Consultation
Get Free Proposal
Glendale, Arizona
8 Yrs Experience
Licensed in AZ
Arizona Summit School of Law

I am a lawyer in Glendale, Arizona. I have practiced in contract work including buy/sell agreements, contracts for the purchase of goods and services and real estate. I also practice in bankruptcy law and sports and entertainment law.

Gregory D. on ContractsCounsel
View Gregory
Member Since:
September 30, 2022

Gregory D.

Attorney at Law
Free Consultation
Get Free Proposal
Wake Forest, NC
3 Yrs Experience
Licensed in NC
Norman Adrian Wiggins School of Law at Campbell University

Gregory S. Davis is a native of New York and is a graduate of the Norman Adrian Wiggins School of Law at Campbell University. He also holds an undergraduate degree in Economics from the Wharton School at the University of Pennsylvania and an MBA from Bowie State University. Prior to entering the practice of law, Greg was a Trust officer for one of the largest U.S. Banks, an adjunct professor of finance at Meredith College and a Series 7 licensed financial advisor. Greg is currently the owner of The Law Office of Gregory S. Davis, PLLC ( focusing on Estate Planning, Real Estate and Business Law. Greg is also an adjunct professor of Business Law at Wake Tech.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call