Employee or Independent Contractor: What’s the Difference?

Some professionals assume that contracting an independent contractor is the same as hiring an employee. Not only is this untrue, there is a distinct difference between the two. Virtual assistants, freelance writers, bookkeepers and other independent contractors are not legally on your  staff payroll. The IRS rules are clear in this regard, as ‘how’ you treat a contractor versus an employee or vice versa. Not abiding by the right IRA rule can easily raise a RED FLAG, resulting in an audit.

4 Top Factors to Keep in Mind

Resources. Who is responsible for providing the resources necessary for the work to be completed? Materials, equipment, or supplies are typically not provided to an independent contractor, and they use their own means. Employees are typically given access to whatever is necessary to complete the work.

“I pay for the software my contractor uses. If they are responsible for their own materials, am I running a risk of being audited?”  NO – as long as you properly record the software as your business expense.

Control. Who determines which hours will be worked? How much autonomy is given to the worker regarding how and when the work is done? Naturally, with both an employee and an independent contractor, preferences and specifications are given. However, the difference is that independent contractors typically set their own hours and complete work with little to no supervision or detailed instruction. They can take vacation when they choose, and set their own prices. Employees have regulations to follow and they are told what they will be paid and when they will work.

“I need a virtual assistant to manage my website’s LIVE CHAT from 9 a.m. to Noon. Are you telling me that makes the VA an employee and not an independent contractor?”  In essence, you are paying the VA to make herself available during 9 a.m. to Noon to address any questions prospective customers have regarding your products and/or services. If you are paying her 3 hours a day to do so, you may wish to ask your CPA if you should change it to real-time instead, meaning only the time she is actually addressing the questions.

Payment method and frequency. It is unlikely that an independent contractor would have only one client that pays their full salary. They earn money from a number of sources, and may be paid by cash, check, merchant account (aka Paypal)or another online payment system, and taxes are not withheld. While some agreements are long-term, the income of an independent contractor tends to fluctuate. Employees typically get consistent payroll checks with taxes withheld. Insurance benefits are also never provided for contractors.

“I am paying for a block of hours, consistently. Is this not the same as having an employee?”  Again, there are a few gray areas that need to be discussed with your CPA. As long as you 1099 your contractor, the IRS is likely to accept the standards in which you’re defining an employee.

Temporary or Permanent Work Load? In many cases independent contractors are hired to assist companies and entrepreneurs with tasks on a periodic basis. Sometimes virtual assistants are hired to complete the same tasks each month for the same client, but this does not necessarily mean that they are an employee or an official “team member.” The work type or amount can fluctuate, and there is no obligation on either side to continue beyond the initial agreement. Employees typically have a steady flow of work from day to day or week to week, and the responsibilities are listed in the job description from the beginning.

“I hire summer help to come into my home office, file paperwork, and assist me in organizing for the next year.  Someone told me that this could easily be considered temporary employment, which there are ‘employee temps.’ Is this correct?”  Yes – you are contracting temporary help. Often, the pay-out for such a job is less than $600; therefore, you need not be concerned as to if you’re paying them as an independent contractor or employee.

Can there be a team of independent contractors?

For legal purposes, it is best to avoid using the term “team” when talking about independent contractors. If a virtual assistant or freelance writer claims to have a “team,” they are really just subcontracting the work, and those other associates are simply subcontractors and not your (or their) employees. It is possible for a network of subcontractors to exist, but each individual has the right to decline work at any time without fear of losing employment, since it is not technically their “job.”

Think of it this way – If your home needs to be professionally cleaned, you contract a company to come in and clean. The company may have three employees do the job.  You’re not paying all three, only the company for services rendered.

The bottom line is that employees do not have the kind of freedom that independent contractors have.  Employees don’t provide their own resources and they don’t set their own hours. You can’t expect to dictate these things without facing the tax liabilities that regular employers have.