Understanding the differences between employees and independent contractors requires more than choosing the right tax form.
What is the difference between contractors and employees?
Employees typically work full-time and permanently and receive benefits provided by the company, whereas contractors usually work part-time, temporarily, or on a project basis and typically do not receive limited or no benefits at all.
Hiring Process
Employees are screened, presented, and hired by human resources. Once hired, the employer must request additional information from the employee, such as date of birth, marital status, and citizenship status. The contractor communicates with the individual or company that wishes to obtain a specific service or task. After accepting their job offer, the contractor signs a contract with the company for the duration of the project and based on the agreed-upon terms.
Tax Forms
Employee information is recorded on Form W-4, including the employee’s name, address, Social Security number, tax filing status, and number of allowances. Form W-9 is used to record their name, address, taxpayer identification number, and certification regarding backup withholding. Form 1099 reports payments of $600 or more during the fiscal year.
Tax Reporting
The employer reports all money paid to the employee during the tax year on Form W-2, including state and federal taxes. Both employers and employees contribute 6.2% to Social Security taxes and 1.45% to Medicare taxes, on a 50-50 split. The employer only pays FUTA taxes. Contractors report their state and federal taxes and pay both the employee’s and employer’s share of self-employment FICA taxes, which is 15.3% of their income.
Insurance
The Social Security Administration provides unemployment insurance for employees who meet specific eligibility requirements. Unemployment insurance is not available for independent contractors.
Payment Terms
Employees earn hourly wages or salaries for an indefinite period of time. Employers may also offer commissions and bonuses. Employees are paid by the company weekly, bi-weekly, monthly, or any other arrangement agreed upon at the time of employment. Companies bill contractors for payment based on agreements made prior to the work performed.
Tax Responsibility
The way taxes are set up for contractors and employees differs. Employers withhold taxes from employees’ wages but not from independent contractors’ pay. Contractors are technically self-employed and their income is subject to self-employment taxes (Social Security and Medicare, also known as FICA).
Work Supervision
Employers have greater control over where, when, and how employees perform tasks. Contractors receive less direction on how to complete tasks. If you want more worker supervision and project oversight, hire employees. Contractors can meet your business needs on projects that require greater flexibility and less oversight.
Benefits
Benefits are often offered to employees by employers, such as health insurance, retirement plans, paid vacation time, and sick days; while these benefits are not offered to contractors. Employees are also incentivized for good performance through salary increases, commissions, or bonuses. Incentives can be offered to contractors as well, but it is not expected.
Relationship
Contractors are often hired for a specific project, and companies can decide whether to continue or terminate the relationship after the project is completed. Employees are hired on a more permanent basis and typically have longer, more stable relationships. Contractors work for themselves while providing a service or product to you, whereas employees work for you based on your terms.
Payment Expectations
Employees are compensated based on an hourly wage or salary and are paid on a specific and fixed schedule. Contractors are paid by the hour or by the project according to the terms agreed upon beforehand. Payment terms should specify when payments are to be made, such as upon completion of a specific task or in periodic amounts.
Responsibility
Taxation
The way contractors’ and employees’ taxes are structured differs. Employers deduct taxes from employees’ wages but not from independent contractors’ pay. Contractors are considered technically independent and their income is subject to self-employment taxes (Social Security and Medicare, also known as FICA).
Work Oversight
Employers have more control over where, when, and how employees perform their tasks. Contractors receive less direction on how to accomplish tasks. If you want more oversight of workers and project monitoring, hire employees. Contractors can meet your business needs for projects requiring greater flexibility and less supervision.
Benefits
Benefits are often offered to employees by employers, such as health insurance, retirement plans, paid vacation, and sick days; whereas these benefits are not typically provided to contractors. Employees are also incentivized to perform well through salary increases and commissions or bonuses. Incentives can be offered to contractors as well, but are not expected.
Relationship
Contractors are often hired for a specific project, and companies can decide whether to continue or end the relationship after the project is completed. Employees are hired on a more permanent basis and typically have longer, more stable relationships. Contractors work for themselves while providing a service or product to you, whereas employees work for you under your terms.
Payment Expectations
Employees are compensated based on hourly wages or salaries and are paid on a fixed, regular schedule. Contractors are paid by the hour or per project according to pre-agreed terms. Payment is made to the contractor after receiving an invoice. The contract terms should specify when payment occurs, such as upon completion of a certain task or at regular intervals.
Tax Liability
The way contractors’ and employees’ taxes are structured differs. Employers deduct taxes from employees’ wages but not from independent contractors’ pay. Contractors are considered technically independent and their income is subject to self-employment taxes (Social Security and Medicare, also known as FICA).
Work Oversight
Employers have more control over where, when, and how employees perform their tasks. Contractors receive less direction on how to accomplish tasks. If you want more oversight of workers and project monitoring, hire employees. Contractors can meet your business needs for projects requiring greater flexibility and less supervision.
Benefits
Benefits are often offered to employees by employers, such as health insurance, retirement plans, paid vacation, and sick days; whereas these benefits are not typically provided to contractors. Employees are also incentivized to perform well through salary increases and commissions or bonuses. Incentives can be offered to contractors as well, but are not expected.
Relationship
Contractors are often hired for a specific project, and companies can decide whether to continue or end the relationship after the project is completed. Employees are hired on a more permanent basis and typically have longer, more stable relationships. Contractors work for themselves while providing a service or product to you, whereas employees work for you under your terms.
Payment Expectations
Employees are compensated based on hourly wages or salaries and are paid on a fixed, regular schedule. Contractors are paid by the hour or per project according to pre-agreed terms. Payment is made to the contractor after receiving an invoice. The contract terms should specify when payment occurs, such as upon completion of a certain task or at regular intervals.
Tax Liability
The way contractors’ and employees’ taxes are structured differs. Employers deduct taxes from employees’ wages but not from independent contractors’ pay. Contractors are considered technically independent and their income is subject to self-employment taxes (Social Security and Medicare, also known as FICA).
Supervision
Work
Business owners have more control over where, when, and how employees perform tasks. Contractors receive less direction on how to complete tasks. If you want more supervision of workers and project oversight, hire employees. Contractors can meet your business needs for projects that require greater flexibility and less oversight.
Benefits
Employees are often offered benefits by employers, such as health insurance, retirement plans, paid vacation, and sick days; while these benefits are not provided to contractors. Employees are incentivized to
Source: https://www.thebalancemoney.com/employee-vs-contractor-which-should-you-hire-5322788
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