Employee and Independent Contractor Defined
You may have persons working for you and with you in your business. They may be employees or independent contractors. Knowing what your business relationships are with these persons will help you determine your legal obligations towards them, and help you comply with the law. Let this article help you know how to distinguish one from the other.
As an employer, you are responsible for making sure your employee pays taxes to the government from the salary you are providing them.
You are therefore duty-bound to withhold or set aside a part of their salary to cover for their tax obligations, which include income tax and taxes for Social Security and Medicare. Often, it is difficult to tell one from the other because of the similarities in their work. With the variety of services you get from various persons, how do you know when the person is your employee or just an independent contractor? If the person is an independent contractor, he is considered self-employed and has the sole responsibility for paying his taxes.
As said, it is important to know the legal differences between an employee and an independent contractor (which may also be called consultant) because an employee status carries with it implications about benefits, taxes and liabilities. And non-performance on the part of the employer of its obligations toward the employees and toward the government carries with it corresponding penalties.
Differences Between Employee and Independent Contractor
Employees are directly under the authority of employers and employers are legally bound to provide certain benefits to employees. Employees perform services for the employer without incurring the related costs for the performance of such tasks. All such expenses go to the bill of the employer. Employees could start working for the employer without the specific skills and knowledge needed by the job; but receive trainings at the expense of the employer. Their rights are specially stated under state and federal laws and they often have legal claims to health and liability insurance as well as unemployment pay.
Independent contractors come equipped with their expertise to provide services to other parties, one of which could be you (employees usually work with only one employer). It means they come with the knowledge gained from experience they get somewhere else. They work at their own pace, location and direction, and usually pay for the costs of performing the tasks related to a service contract. They are not entitled to additional benefits and pay other than what was stated in the contract.
There are also cases when independent contractors are treated as statutory employees for the purpose of certain employment taxes. If an employer misses on his obligations to an employee, he could be penalized. If he wrongly classifies an independent contractor as an employee, he may be burdened with financial obligations that he shouldn't have been liable in the first place.
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