Independent Contractors vs. Employees
Properly classifying an individual as an employee or independent contractor is vital since there are tax implications involved. Independent contractors are issued a 1099-MISC form for federal government purposes, reap no company employee benefits, no state or federal taxes are withheld from their pay, and no unemployment taxes are paid on their behalf. Let’s define an ‘individual contractor’ since the majority of us have been an employee one time or another in our life and know its definition all too well.
An independent contractoris one who is not subject to the will and control of the employer. The employer does not have the right to control or direct the manner or method of performance, although the results to be accomplished are controlled.
Independent contractors hold themselves out to the public as such. Generally, they furnish materials as well as labor and use their own tools in the performance of the work.
Services performed by independent contractors cannot be summarily terminated without recourse. A contract for labor only will normally be considered a contract of employment. How the worker is treated, not a written contract, determines employment status.
An individual contractor supplies their own tools and equipment. For example, a cleaning person is contracted to clean a corporate office. The cleaning person as an individual contractor would supply the cleaning materials and equipment.
An individual contractor exerts control of how a project or task is completed. For example, a sales person is hired to sell a set number of units of a particular product. The sales person as an individual contractor will determine the hours spent, the means of advertisement, and all other aspects regarding the sell of the products.
An individual contractor cannot be fired without recourse. As with all contracts, if one party is to break the contract there are usually fines and legal involvement. Unlike an employee, who can be fired without ‘early termination’ fines and legal involvement due to a ‘breach of contract’.
Hiring an individual as an independent contractor may be favorable due to its tax relief benefits, but one must ensure that the individual is classified and handled properly as an individual contractor to avoid any severe consequences.