At least 10% of all employers misclassify one of their workers. With the rise in contract work, it’s an easy mistake to make, but it could get you into serious legal trouble. When it’s all said and done, you could have to pay thousands of dollars in legal fees.
The best way to avoid this problem is to familiarize yourself with what an employee and an independent contractor are.
Contractor vs. employee, what sets the two apart? It’s all a matter of how they’re compensated. Contractors are more independent and flexible as well.
These are only a few ways contractors and employees differ. Check out this guide to learn more.
What Is a Contractor?
Independent contractors work as if they own their own business. Most of the time, they work with multiple clients at once, or work with one temporarily and move on to the next job after they’re finished.
Contractors are in charge of taking taxes out of their paychecks on their own and setting their schedules themselves.
What Is an Employee?
Employees work for a particular business. The company is in charge of the work that the person puts in and sets their hours.
The worker has to fill out a W-4 form at the beginning of their employment that dictates how much of their paychecks get eaten up by taxes.
Contractor vs. Employee: Taxes, Benefits, and Compensation
The main thing that sets regular employees apart from independent contractors is benefits, compensation, and taxes.
Employees are on payroll. They earn a set amount of money per hour for their services. The company takes a chunk out of a worker’s paycheck to go toward taxes.
Regular employees also have the potential to opt-in for certain perks. Most companies offer their workers things like health insurance, a 401K, paid vacations, and a group benefit plan.
A business hires contractors temporarily, pays them for their services, and lets them go. Companies don’t offer contractors any kind of benefits, and as stated before, they don’t take taxes out of their paychecks, so they have to do it themselves.
Contractor vs. Employee: Independence
Contractors have a little more independence than employees. Contractors are hired to handle a particular project. As long as they get their work done, most companies don’t care how they do it.
Employees are hired to fit into a particular role. All their tasks are highlighted in their job description. If a worker does something that isn’t part of that description, they could get fired.
Contractor vs. Employee: Training
Contractors are experts in their chosen fields. That means companies don’t have to bother training them at all. Business owners give them the details of the project they’ll be working on and then set them loose.
Employees have to go through an entire onboarding and training process. Companies want to make sure they have a complete understanding of the culture and how the business runs.
Most business owners pair a new hire with a buddy who can show them the ropes and give them a detailed explanation of their job duties.
Contractor vs. Employee: Goals
Business owners don’t want their company to be a revolving door when it comes to employees. The onboarding and training process isn’t only lengthy. It’s expensive.
That’s only one reason why any employee guide will tell you that having a large turnover rate is bad. It can prevent companies from attracting new talent as well. That means hiring goals for employees are often much more intricate than the goals put in place for contractors.
When it comes to employees, most business owners focus on loyalty. They want to keep them around for a while.
Since contractors don’t affect turnover rate, companies are more worried about the expertise they can bring to a project. They’ve already accepted that the contractor will leave once their job is done.
Contractor vs. Employee: Flexibility
Contractors have plenty of flexibility. They can work for ten different companies at once if they have the time and energy to do so.
If a contractor wants to take some time off to go on vacation, they can whenever they want. All they have to do is not take on any new jobs for a while. They’ll miss out on a paycheck, but they’ll get their time off without having to answer to a boss.
Employees typically have to ask off two weeks in advance. Even if they have an emergency, they’re still expected to make it to their shift or find coverage.
What Happens If You Misclassify an Employee?
The penalties for misclassifying an employee can vary. In most cases, you’ll have to pay some money in back taxes.
If the misclassification was intentional, you could face a lawsuit and criminal charges.
If you’re not sure if a person you’re working with qualifies as an employee or independent contractor, the IRS has a test you can take on their website.
Understanding the Differences Between Employees and Contractors
Contractor vs. employee: As you can see, there are a lot of differences between the two.
Contractors have more freedom and flexibility than employees. They also get paid differently and don’t have access to the same types of benefits.
If you’re unsure if an employee is a regular worker or an independent contractor, it’s important to find out. If you were to misclassify someone, it won’t end well for you.
Are you looking for more employee tips that will keep your company out of trouble? Visit the Legal Matters section of our blog!