The level of control an employer has over a worker distinguishes an employee from an independent contractor. An employee has more rules and regulations, while an independent contractor has more independence. Financially, an independent contractor pays their own taxes and has more control over their payment. The IRS uses three factors to define the difference: behavioral control, financial control, and relationship type. These factors consider the level of control and independence between employer and worker.
One of the major defining factors between an employee and an independent contractor is the amount of control an employer has. A person can be considered an employee when their employer has some level of control and direction over how they work. An independent contractor may provide services for an employer, but the employer has less control over the means and methods of the work performed.
An example to show the difference between an employee and an independent contractor would be hours worked. An employee may have a certain number of hours that he works, say 9am to 5pm, for which he is paid a certain amount by the hour. The independent contractor, however, may be declared a fixed fee by the employer regardless of the number of hours required to complete the task.
The employer has little say in how long it takes for the independent contractor to complete a task. Also, the employer doesn’t have much to say about the methods the independent contractor uses to carry out the task, although there are usually guidelines set by the employer regarding the work to be performed. An employee is usually bound by many more rules and regulations regarding the time and methods used to complete a task.
Financial considerations are another major difference between the employee and the independent contractor. An independent contractor is responsible for paying their own income tax. When a worker is an employee, the employer is required to pay his personal income tax. The employer must also pay unemployment tax on the wages paid to an employee.
The employer must provide a form showing the employee’s total wages and the amount that was withheld from the employee’s wages. Independent contractors are responsible for paying their own federal income tax. They are also responsible for paying their own self-employment tax.
The Internal Revenue Service uses three main factors to define the difference between an employee and an independent contractor. These three factors all rely on the level of control and independence that exists between employer and employee. The three main factors are behavioral control, financial control, and relationship type.
Behavioral control includes the control an employer has over a worker’s methods, as well as the amount of training and education provided by the employer. Financial control covers aspects including the worker’s investment in the business and how the worker receives his payment. Financial control also covers if the worker has unreimbursed business expenses.
The relationship type factor includes the written contracts entered into between both parties and the duration of the relationship between the parties. This factor also includes whether employee benefits such as insurance and sick pay are available to the worker. These guidelines are often used in compensation court appeals to determine the difference between an employee and an independent contractor.
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