Contractor vs Employee
Understanding the key differences and classification factors for federal rules.
Independent Contractor
A person or business that provides services to another entity under terms specified in a contract.
Key characteristics:
- Controls how work is performed
- Sets own schedule
- Provides own tools and equipment
- Can work for multiple clients
- Pays own taxes (self-employment tax)
- No benefits provided
Employee
A person who works for an employer under the employer's control and direction.
Key characteristics:
- Employer controls how work is done
- Set schedule by employer
- Employer provides tools and equipment
- Typically works for one employer
- Employer withholds taxes
- May receive benefits
Classification Factors
The IRS and Department of Labor consider multiple factors when determining classification. No single factor is determinative, but these are key considerations:
Behavioral Control
- Instructions and training provided
- Evaluation systems
- Degree of instruction
Financial Control
- Investment in equipment
- Opportunity for profit/loss
- Services available to market
Relationship Type
- Written contracts
- Benefits provided
- Permanency of relationship
Important Note
Misclassification can result in penalties, back taxes, and legal issues. When in doubt, consult with a tax professional.