Independent Contractor vs. Employee

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 2,247 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

View Max
Member Since:
July 12, 2021

Max M.

Business Attorney
Free Consultation
Get Free Proposal
Baltimore, Maryland
15 Yrs Experience
Licensed in MD
Georgetown University Law Center

Results oriented business attorney focusing on the health care sector. Formerly worked in Biglaw doing large multi-million dollar mergers and acquisitions, financing, and outside corporate counsel. I brought my skillset to the small firm market, provide the highest level of professionalism and sophistication to smaller and startup companies.

View Jaroslaw
Member Since:
July 20, 2021

Jaroslaw P.

Free Consultation
Get Free Proposal
Warsaw, Poland
15 Yrs Experience
Licensed in AK
Wroclaw University - Law

Attorney - I graduated in Law from the University of Wroclaw and in Economics from the Scottish University of Aberdeen; My legal interests include, in particular: contracts, intellectual property, and corporate law, as well as transactional / regulatory advisory along with related risk management (M&A); The industries with which I have worked most often are: IT, real estate and construction, professional sport, industrial chemistry and medicine, oil & gas, energy, and financial services; I possess many years of experiences working with international entities for which I have prepared and negotiated contracts, as well as (due diligence) reports, analyses, litigation documents, and presentations; Apart from law firms, I have also worked for investment banks and big 4 - thanks to that I also gained financial, technological, and consulting experiences; I shall be described by: accuracy, openness, honesty, concreteness, a broad approach to the problem, and ... a lack of bad manners, along with a good sense of humour :)

View Yaser
Member Since:
July 21, 2021

Yaser M.

Self Employed
Free Consultation
Get Free Proposal
12 Yrs Experience
Licensed in TX
University of London

I have practiced law in foreign jurisdiction for more than 11 years and more than one year in Texas. I am Texas licensed attorney. Practice areas include Corporate: incorporation of business entities, drafting of operating agreements, by-laws, and business contracts; Commercial: business disputes, demand letters, cease and desist lettera, dealing with insurance companies, negotiations, settlements of disputes, commercial real estate, and business litigation Litigation: business disputes, personal injury, civil rights, cross-border matters, maritime matters, drafting of litigation pleadings, motion practice, legal research, white-collar defense.

View Joseph
Member Since:
July 26, 2021

Joseph L.

Free Consultation
Get Free Proposal
39 Yrs Experience
Licensed in CT
Southwestern University School of Law

Mr. LaRocco's focus is business law, corporate structuring, and contracts. He has a depth of experience working with entrepreneurs and startups, including some small public companies. As a result of his business background, he has not only acted as general counsel to companies, but has also been on the board of directors of several and been a business advisor and strategist. Some clients and projects I have recently done work for include a hospitality consulting company, a web development/marketing agency, a modular home company, an e-commerce consumer goods company, an online ordering app for restaurants, a music file-sharing company, a company that licenses its photos and graphic images, a video editing company, several SaaS companies, a merchant processing/services company, a financial services software company that earned a licensing and marketing contract with Thomson Reuters, and a real estate software company.

View Harry
Member Since:
July 27, 2021

Harry S.

Free Consultation
Get Free Proposal
8 Yrs Experience
Licensed in NY

We are a boutique legal practice focused on media, fintech and international trade and have significant experience of advising on high value matters in these areas and delivering results. We advise start-ups, established businesses and professionals on a wide range of commercial and corporate arrangements, not only in the UK, but also in the European Union, United States and Latin America.

View Talin
Member Since:
July 30, 2021

Talin H.

Free Consultation
Get Free Proposal
13 Yrs Experience
Licensed in IL
DePaul College of Law

Talin has over a decade of focused experience in business and international law. She is fiercely dedicated to her clients, thorough, detail-oriented, and gets the job done.

View Sam
Member Since:
July 30, 2021

Sam W.

Entertainment attorney
Free Consultation
Get Free Proposal
Los Angeles
8 Yrs Experience
Licensed in CA
Columbus School of Law, The Catholic University of America

Entertainment attorney and film producer. Counsel clients on all matter of entertainment-related contracts, including talent representation, crew deals, financing agreements, and production legal. Former litigation attorney and owner of a documentary and scripted film and television production company. Well versed in small business foundation and general business contracts.

View Craig
Member Since:
August 3, 2021

Craig M.

Free Consultation
Get Free Proposal
6 Yrs Experience
Licensed in ME
New York Law School

I have been practicing law for more than 4 years at a small firm in York County, Maine. I recently decided to hang my shingle, Dirigo Law LLC. My practice focuses mostly on Real Estate / Corporate transactions, Wills, Trusts, and Probate matters.

View Tim
Member Since:
August 3, 2021

Tim M.

Managing Partner
Free Consultation
Get Free Proposal
Cambridge, MA
24 Yrs Experience
Licensed in MA, NY
Boston College Law School

Tim has 20 years of experience representing a wide variety of emerging and established companies in the technology, software, bitcoin and professional services industries. He works directly with his clients’ executives and boards of directors on corporate, intellectual property, and securities law issues. Recently, Tim has advised clients on Series A and Series B financings, corporate structuring, complex video licensing agreements, and structuring new hedge funds. Tim previously served as Forrester Research, Inc.’s General Counsel and Secretary where he was chief legal officer, led the company’s legal group, and managed the company’s legal and regulatory affairs. Tim played an integral role in the company’s initial public offering in 1997 and coordinated its secondary offering in 2000. He directed the legal process in the company’s acquisitions of Giga Information Group, Inc., Fletcher Research and Forit GmbH and oversaw over $125million in transactions. He also managed the company’s intellectual property assets. Tim is admitted to practice in Massachusetts and New York. Tim holds a Juris Doctor degree from the Boston College Law School and a Bachelor of Arts degree from Trinity College

View Melissa
Member Since:
August 5, 2021

Melissa G.

Owner/Managing Member
Free Consultation
Get Free Proposal
18 Yrs Experience
Licensed in DC, IL, OH
University of Michigan

Melissa Green recently opened her own law firm which focuses on providing general counsel services, business formation services, and contract services (including negotiation assistance). Prior to opening her own firm, Melissa joined the American Medical Association (AMA) as an Assistant General Counsel in November 2019. In her role at the AMA, Melissa supported the CPT and Masterfile licensing programs, in addition to supporting the legal needs of the Professional Satisfaction and Practice Sustainability business unit. Prior to arriving at the AMA, Melissa was the Chief Legal Counsel and Privacy Officer at The Chartis Group, a healthcare advisory services and analytics company, headquartered in Chicago, where she was responsible for commercial transactions for Chartis and its wholly owned SaaS company, and also served as the organization’s privacy officer responsible for HIPAA compliance. Melissa started her legal career in Cincinnati, Ohio at the law firm of Frost Brown Todd where she served as an associate in the Corporate department doing healthcare transactions, securities, and general corporate work. In 2007, Melissa transitioned into her first in-house counsel role at GE Aviation. During her time at GE, she had many roles including supporting new engine sales transactions for the Europe/Middle East/Africa region, its Electric Power business located in Dayton, its Engine Services business (supporting the CF34 and CF6 engine lines), and compliance. Upon leaving GE, Melissa had a brief stint at MedStar in Virginia before accepting a full-time position at the University of Maryland Medical System in Baltimore, Maryland in July 2013. Originally from East Lansing, Michigan, Melissa received her bachelor’s graduate from Michigan State University’s – James Madison College and is a graduate of the University of Michigan Law School.

View Robert Jay
Member Since:
August 5, 2021

Robert Jay H.

Free Consultation
Get Free Proposal
New York, NY
41 Yrs Experience
Licensed in NY
New York University School of Law

My Legal career hasfocused on representing businesses (corporations and limited liability companies) as general outside counsel. In this capacity, I have drafted a broad range of legal documents as well as analyzed proposed agreements drafted by the other party's attorney to the agreement for the pupose of determining the risks to which my client would be exposed. I maintained the client's minute book if no one in-house was available for that task. Additionally, if rquested, I served as a general advisor to the client's executive offers and to its Board of Directors.

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