One of the major differences between independent contractors and employees are that independent contractors are responsible for paying their own taxes from their earnings. The hiring company is not responsible for withholding state and federal taxes, Social Security or Medicare taxes for a contractor or vendor. Employers are responsible for paying the income of their employees as well as withholding all taxes and offering healthcare benefits under law.
The IRS has a 20 point checklist to help businesses properly classify their workers as either independent contractors or employees. Here are the major points used to classify independent contractors:
- Who has control? A worker is an employee if the person for whom he works has the right to direct and control him concerning when and where to do the work. The employer need not actually exercise control; it is sufficient that he has the right to do so.
- Right to fire. An employee can be fired by an employer. An independent contractor cannot be fired so long as he or she produces a result that meets the specifications of the contract.
- Training. An employee may be trained to perform services in a particular manner. However, independent contractors ordinarily use their own methods and receive no training from the employer.
- Set hours of work. Workers for whom you set specific hours of work are more likely to be employees. Independent contractors, on the other hand, usually establish their own work hours.
Misclassifying an employee as an independent contractor can result in serious fines and penalties by the IRS. 1099 refers to the form companies issue to independent contractors for tax purposes. It’s very important you aren’t issuing a 1099 designation to someone who should be classified as an employee and receive W-2 forms instead, which documents how much money was withheld throughout the year for federal, state, Social Security and Medicare taxes. To help you determine the right classification for your workers, consult the complete IRS checklist. If you’re still unsure, it might be best to consult an accountant or a business attorney who specializes in small business and corporate laws.