Independent Contractor vs Employee

Why it Matters and What You Can do to Classify Your Workers

As an owner of a business, it’s vitally important for you to accurately determine when a worker who contributes services to you is an independent contractor or an employee. If the worker is an employee, you’re required to withhold and pay Social Security and Medicare taxes, withhold income taxes and pay unemployment taxes on top of the salaries you pay.

Alternatively, if the person functions as an independent contractor, you don’t need to reserve or pay any taxes on the wages for him or her. An independent contractor is subject to paying his own Social Security, Medicare, and income taxes. If he or she is arranged as an employee but you have managed the person as an independent contractor, it could be a high-priced blunder for your business.

What’s the Relationship?

Despite the fact that the distinction is typically defined as “employee vs. independent contractor”, there’s really only four potential categorizations for a worker:

  • an employee (common-law employee)
  • an independent contractor
  • a statutory employee (particular independent contractors who, by law, are handled as employees)
  • a statutory nonemployee

Many business proprietors inadvisedly believe that they can directly assign a person to the position of an independent contractor instead of an employee, and leave it at that. In actuality, to settle whether a person rendering a service to your business is an independent contractor or an employee, you need to review the level of control that you apply over the person.

Behavioral determinants

Does the record show that your company has a power to control or direct the worker? A worker is usually an employee when the organization has the oversight to control and direct his production, even if the company doesn’t truly exercise the right to control or direct how the duties are performed. Behavioral constituents include:

Varieties of instructions proffered. A business typically gives an employee clear instructions about how, when and where to operate. The directions might include what equipment or tools to handle, which workers to hire for assistance, where to acquire services and supplies, what duties must be completed by which particular individuals, and what sequence or order to observe when carrying out a task.

Delivering these sorts of preparations to a worker makes it more than likely that he or she will be administered as an employee instead of an independent contractor.

Economic aspects

How much authority does the business possess over the financial factors of the worker’s position? The more command the business holds, the more it’s probable that the person is an employee. Economic elements include:

Notable investment. An independent contractor often has expended an ample investment on the equipment that he utilizes in fulfilling his tasks. Like other aspects, there’s a definite rule towards investments of equipment.

In some industries like construction, workers contribute thousands on the equipment and tools they handle and are still treated as employees, while for other kinds of work done by independent contractors, considerable expenditures aren’t needed.

Evaluating the benefits

A business needs to weigh each of the factors above as they judge whether to negotiate a worker as an independent contractor or an employee. It’s possible that some factors will confirm that the individual is an employee, while other facts will designate the worker as an independent contractor. The major key is to observe the undivided relationship of the worker to the company. Measure the extent or degree of the freedom of the business to control and direct the worker. Thoroughly document all of the factors considered when coming up with your resolution.

Ascertaining whether a worker is an employee or an independent contractor is a demanding task for any business. Obey these rough guidelines and that task will surely become more clear. Our lawyers can help you solve the demanding challenges that often arise in these situations. For more information, speak with one of our attorneys at Andrew Szocka, P.C. for qualified guidance in the Chicagoland area.


***This is not intended to be legal advice and you should consult with an attorney.

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