Independent Contractor vs. Employee

Independent Contractor vs. Employee

Confused if you are an independent contractor or an employee? Two common job types when you get hired by a business are Employee (W2) and Independent Contractor (1099). While an independent contractor supplies goods or services to a company, an employee carries out the services for the business.

Hiring an independent contractor gives more flexibility and less financial burden to an employer. An independent contractor is required to pay for all supplies used, employment taxes, and insurance.

While these obligations are great for an employer, an individual can also benefit from being an independent contractor. For example, if a scientist was an employee and created a patent, it would actually belong to the business they work for. If the scientist was an independent contractor, they would keep the patent for themselves.

When an independent contractor is misclassified as an employee, it creates an unneeded financial burden for the independent contractor. In addition, if an employee is misclassified as an independent contractor, this could create personal hardship for the employee.

If you believe you are being misclassified as an independent contractor or an employee, the IRS provides a test to decide the accuracy of your hiring.

Internal Revenue Service Test:

Behavioral: “Does the company control or have the right to control what the worker does and how the worker does his or her job?”

*Things to think about: Where and When is the work done? If the business is giving you a desk to sit at, a set schedule, provides training, and determines what you do on a day to day basis, chances are you are an employee.

Financial: “Are the business aspects of the worker’s job controlled by the payer?”

*Things to think about: If you are financially invested in the products used to do the job and you have the opportunity for profit or loss, you likely are to be considered an independent contractor. On the other hand, an employee is typically reimbursed when expenses arise. An employee is generally guaranteed a weekly paycheck with the same hourly rate of pay; in addition, the business will also pay their employment taxes. An independent contractor will typically be paid by the project or they will be contracted to be paid for a certain amount of hours.

Type of Relationship: “Are there written contracts or employee type benefits?”

*Things to think about: Employers pay employee benefits such as medical, dental, vision, retirement, and paid time off. Businesses typically do not allow independent contractors to share these benefits. The length of time will also determine if an individual is an employee or independent contractor. When the individual does not have a contract end date, or there is no end in sight, there should be a revision if the individual is actually an employee.

To find out more information about the test: CLICK HERE.
To explore the DOL’s Economic Reality Test: CLICK HERE



If you have reviewed the test and have come to the decision that you have been misclassified either as an independent contractor or an employee, there are a few steps you can take to make sure it gets corrected.

The first thing to do is talk with the Business. I suggest printing out the guidelines from the IRS and DOL and highlight the categories and examples in which you believe apply to you. Chances are they were unaware of the situation and would love to have you become employed with them.

If they reject the proof that are you misclassified, you can get the IRS Involved. To do this, you will need to fill out the SS-8 form and turn it into the IRS. There is no fee for this filing. You will answer a set of questions about the job duties and what you believe qualifies you for the misclassification.

The IRS is allowed to reach out to your employer and is likely to interview others in your same position or similar positions. They will then determine your status and all parties must follow.

If you get fired during or due to this process and the IRS comes to the conclusion that you are classified as an employee, you will be allowed to apply for Unemployment Insurance. In addition, if you were hurt on the job, you will also be able to apply for Workers Compensation. You will work closely with the IRS and the business to determine the difference in taxes that you paid and what the business should have paid or vise versa.

In conclusion, if you feel you are misclassified as an Independent Contractor or an Employee, do not be afraid to talk with the business or reach out to the IRS for help. Because we spend a huge chunk of our life time working, we shouldn’t have to deal with added unneeded stress from misclassification. Utilize the resources the Department of Labor and the Internal Revenue Service have provided for you.

Comments are closed.
%d bloggers like this: