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Employees vs. Contractors - What's The Difference?

Written by: Manage Your Business

Article Overview: Whether a person is an independent contractor or an employee generally depends on the amount of control exercised by the employer over the work being done. Dictating how a job is to be done or limiting the actions of the worker may establish an employer-employee relationship.

Employees vs. Contractors - What's The Difference?

Employees vs. Contractors - What's The Difference?

Whether a person is an independent contractor or an employee generally depends on the amount of control exercised by the employer over the work being done. Dictating how a job is to be done or limiting the actions of the worker may establish an employer-employee relationship.

An independent contractor:

* Operates under a business name
* Has his/her own employees
* Maintains a separate business checking account
* Advertises his/her business' services
* Invoices for work done
* Has more than one client
* Has own tools and sets own hours
* Keeps business records


An employee:

* Performs duties dictated or controlled by others
* Is given training for work to be done
* Works for only one employer


The Internal Revenue Service relies on the facts in each case. It does not recognize the validity of any written agreement between the parties. Anyone can get a ruling from the IRS by completing Form SS-8.

For most small businesses, independent contractors should not be considered as substitutes for regular employees. Government agencies generally find that people in the work force are legally employees for tax purposes; the cost of being wrong, remitting unpaid payroll taxes, interest, and penalties can be very high.

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Related Forum Posts
Re: Template of Service Agreement/Contractor Agreement - Shimmy- I, too, would be happy to share my template contract for a service provider. But beware, a template agreement may not be sufficient to properly address your needs. Some key differences between Employees and Service Providers: 1. Tax Status. Employers are responsible for withholding tax on employee's earnings. Independent Contractors are responsible for reporting their income/taxes. There is a significant reporting burden and liability associated with this. 2. Confidentiality/Intellectual Property. Often times, employee handbooks will specify an employees confidentiality obligations and many states impute a duty of loyalty. Contractors are under no such obligations absent a written agreement. Same thing for IP/Creative works. The copyright Act draws a sharp and significant distinction between employees and contractors when it comes to ownership of creative works. 3. Liability for tortious acts. Generally an employer is liable for the tortious acts of its employees under the theory of respondeat superior. An entity hiring a contractor may/may not be liable, but without a written agreement for the contractor to indemnify/defend the hiring entity, their may be little recourse against the contractor. There are many other subtle differences too numerous to mention. I hope you find this helpful.
Re: Hello from a San Diego-based marketer - Welcome Aaron! Whats the next stage for your business? Ben
Re: New, young entrepreneur - Congrats H20ismyLife! Do you have a website so we can see any of your work? Whats the next step for you?
Re: Template of Service Agreement/Contractor Agreement - [quote="Dave_Adler":21fe7egl]Shimmy- I, too, would be happy to share my template contract for a service provider. But beware, a template agreement may not be sufficient to properly address your needs. Some key differences between Employees and Service Providers: 1. Tax Status. Employers are responsible for withholding tax on employee's earnings. Independent Contractors are responsible for reporting their income/taxes. There is a significant reporting burden and liability associated with this. 2. Confidentiality/Intellectual Property. Often times, employee handbooks will specify an employees confidentiality obligations and many states impute a duty of loyalty. Contractors are under no such obligations absent a written agreement. Same thing for IP/Creative works. The copyright Act draws a sharp and significant distinction between employees and contractors when it comes to ownership of creative works. 3. Liability for tortious acts. Generally an employer is liable for the tortious acts of its employees under the theory of respondeat superior. An entity hiring a contractor may/may not be liable, but without a written agreement for the contractor to indemnify/defend the hiring entity, their may be little recourse against the contractor. There are many other subtle differences too numerous to mention. I hope you find this helpful.[/quote:21fe7egl] I was thinking these same points as I was reading the earlier posts. I've been working with independent contractors for years - first as one, and then hiring many of others. These are three of the key things to be sure you include in your agreement. If they are truly an independent contractor, they are reasonable to handle their own taxes. I always include a confidentiality clause and very few have tried to break it. Liability can be a huge issue, depending on the sort of business you are in. In the US - there are all sorts of tax rules for state and federal government to distinguish if a person is or is not an independent contractor. If you make the wrong choice there are all kinds of penalties to be paid. Another thing that should be considered is that your business worker's compensation and/or liability insurance may have to cover these people. I know in construction, I'm charged for any independent contractor and their employees if they don't have their own insurance. That can get really pricey. If you're in a similar situation, talk with your insurance company, some will allow an independent contractor to sign an agreement that they will waive your responsibility to insure them. You would still need to pay for their employees, but it does save some money during an insurance audit. Chris
Re: Ways to Boost Productivity - 1. Give Employees More Than a Paycheck 2. Provide Better eSupport Channels to Promote Self-Service 3. Complete your most dreaded tasks first thing in the morning. 4. Outsource as much as possible 5. . Turn off the TV.


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