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Independent contractor or employee?
Q: What is the difference between an independent contractor and an employee?
A: It's a very good question because, although an employee and an independent contractor may perform identical duties for your business, your obligations to each are very different. There are clear advantages to you, the employer, in designating someone as an independent contractor:
- You need not provide him with worker's compensation insurance
- You also need not provide him with unemployment insurance
- You don't have to provide health insurance
- You also don't have to provide a retirement savings plan
- Most importantly, you are not required to pay any portion of his Social Security or Medicare taxes
Because of these perceived benefits, many employers are now trying to get away with calling their employees "independent contractors." Fortunately for the employee, it's not that simple.
There are two main differences between the designations. The first is that independent contractors must, in fact, be independent—they control how, when and where they work. Second, independent contractors must be able to offer their services to the public at large, not just one business. So be careful when you create this job. If you designate it as an independent contractor, but the IRS decides that the worker was really an employee (because he was not truly independent), the penalties for your small business can be quite severe.
Some issues discussed in the expert forum are complex and continually changing.We recommend you consult a professional advisor about your specific circumstances, needs, and applicable laws. More details.