In my practice of advising business owners, they ask this question all the time. What is the difference between an independent contractor and an employee? I have found that most business owners are misclassifying their employees or contractors, which could lead to serious problems down the road. We answer this question by analyzing the background on the form, that is, the actual work, not what homework is written on paper.
If you browse the IRS website, you will find that the IRS establishes a general rule of thumb for defining an independent contractor. The IRS website states that “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the outcome of the work and not what will be done and how it will be done.” This is a very broad definition and may be subject to interpretation. Also, the IRS site states that “you are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. The employer has the legal right to control the details of how services are performed. ” Again, this may be subject to interpretation.
So, as a business owner, how can you be sure that you are classifying your workers correctly to avoid unforeseen legal problems? You must look at the facts of each situation, what the worker’s job really consists of. Some of the factors to consider are: who directs the person’s work? Do you have a boss or do you work independently? Do you provide the necessary equipment for the job or does the worker do it? Does the worker have a fixed schedule with fixed times for meals / breaks or come and go as they please? How are they compensated? Do they have a written contract with a start and end date? Are any benefits provided? Are they required to inform someone or just provide a finished product? An example that I like to use when trying to distinguish between an employee and an independent contractor is this: Let’s say you need to paint your house. You hire a painter to do it. You tell the painter that you need to paint between 9:00 am and 5:00 pm, he can take an hour for lunch and you will provide the supplies for the job. You will pay them for all hours worked. This painter is likely to be considered your employee. On the other hand, you hire a painter to paint your house. You pay $ 3,000 for labor and materials and you only care that the job is completed in 2 weeks. This painter will likely be considered a contractor. Please understand that this is just an example and is in no way intended to comment on the profession of painting.
As you can probably see, this is a very gray area of the law, but one that carries high penalties if not handled properly. Whether you are employing independent contractors or employees is a factual question, a question that needs to be answered up front to avoid long-term problems. Don’t take it lightly. As a business owner, you should work with competent legal counsel to help you analyze and save you money in the long run.