Recently I’ve been asked what the differences between an employee and an independent contractor are within a business. Here are some fundamental differences between the two:
- An employee may be trained whereas an independent contractor typically has their own methods
- Independent contractors are more likely to incur expenses that are not reimbursed such as office rent
- Independent contractors can offer their services to other businesses and consumers whereas employees are controlled by a business which controls what work is to be accomplished
- Employees generally are guaranteed a regular wage for an hourly fee or salary whereas an independent contractor is generally paid a flat fee for a specific job
But there are also some differences with how you file for employees and independent contractors in terms of taxes.
An Independent Contractor is someone who is self-employed and is responsible for paying their own taxes through estimated tax payments. Businesses who hire independent contractors will have to issue Form 1099-MISC, Miscellaneous Income, to all contractors who made $600 or more over the course of a tax year. Therefore, employers should have an updated W-9 form on file for all independent contractors each year.
An employee, on the other hand, is someone who will have to fill out a W-4 annually and is issued a W-2 form for paid wages. A business, in this case, is responsible for withholding income, social security and medicare taxes. Further, as an employee, he or she might be eligible for fringe benefits such as healthcare.
Both W-2s and 1099s need to be provided to employees and independent contractors by 1/31/16. Therefore, start now to make sure you have completed W-9s for all contract people and encourage your employees to review their current paystubs and provide corrections to addresses or social security numbers.
Hopefully this helps answer some questions businesses may have and if not, please feel free to contact me with your questions and I’ll happily discuss this with you further.
