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Independent Contractor vs Employee Checklist & Major Differences

Alyssa Orcuilo07 Jul 2021

It’s essential to understand the differences between an independent contractor and an employee to make sure you’re not violating any laws or rules. There are various tax differences, legal benefits, and other factors that make the two very different. Below, we also outline a checklist that can help companies determine whether they are hiring an independent contractor or employee.

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Independent Contractor vs Employee Checklist

Before we dive into the details, let’s get right to the checklist that you need to determine whether someone working with you is an independent contractor or an employee. There are various factors to consider when a company identifies whether a worker is a contractor or employee. Below is a checklist that can be used. If 3 or more boxes are checked off, it’s likely the worker is an employee. 

☑️ Is the company in control or has the right to control what the worker does and how the worker is doing the job or project?

☑️ Does the company control the business aspects of the worker’s job? These arrangements include aspects like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.

☑️ Is there a written contract or employee benefits such as a pension plan, insurance, or vacation pay?

☑️ Will the relationship between the company and worker continue and is the work a key aspect of the business?

Independent Contractor vs. Employee

Independent contractors and employees have different responsibilities when it comes to taxes and may be offered different benefits. Let’s take a look at how each varies and how you should consider each when providing the right benefits and interacting with each group of workers.

Independent Contractors

Independent contractors get paid for projects they complete. They are responsible for doing their own taxes and usually work a more flexible schedule. For tax purposes, the IRS considers them to be self-employed, which means they have to pay self-employment tax. According to the IRS, you are an independent contractor only if you perform services that are not controlled by an employer, meaning what and how the service is done. Independent contractors are also self-employed individuals. Some common services offered as independent contractors include: 

  • Doctors
  • Dentists
  • Veterinarians
  • Lawyers
  • Accountants
  • Contractors and subcontractors
  • Public stenographers
  • Auctioneers

Employees

Employees are workers who get paid a regular wage, receive employee benefits, have taxes withheld from those wages, and have their work and schedule dictated by the employer. Full-time employees may also be offered more protection: severance, workers compensation, anti-discrimination protection, etc. Their employers have to pay payroll taxes on their wages. Where employers typically get into trouble is where they treat employees like a contractor.

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Major Differences Between Independent Contractors & Employees

There are many differences between an employee and a contractor. Below you can find a chart that breaks down the differences between various aspects of a job and how it works in an employee vs. contractor relationship.

Employees vs Contractors: Major Differences

DescriptionEmployeeContractor
Employment Laws
  • Covered by a number of federal and state employment and labor laws
  • Not covered by employment and labor laws
Hiring Practice
  • A potential employee completes an application that is handled by Human Resources.
  • The approved applicant receives a job offer.  After a person accepts the position, the employer must ask for additional information about the employee such as date of birth, marital status, and citizenship status.
  • When hired, the contractor enters into a contract, including a Statement of Work with the legal or procurement section of the business.
Tax Documents
  • Provides name, address, Social Security number, tax filing status, and number of exemptions on a W-4
  • Provides name, address, Taxpayer Identification Number, and certification about backup withholding on a W-9
Payer’s Tax Reporting Requirements
  • Reports all money paid to the employee during the tax year on a W-2
  • Reports payments of $600 or more in a calendar year on a Form 1099
Reporting to Other Agencies
  • Reports for state and federal Unemployment Insurance
  • None
Value of Work or Contract
  • Earns either an hourly rate or a salary
  • Either earns a total, hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid when the job is completed.
Getting Paid
  • Unless formally changed, employees get paid by a specific pay period.
  • Federal and state laws require that an employee be paid on the normal pay date or earlier if the paycheck is not negotiable on the normal pay date, which can occur on holidays.
  • A contractor typically submits an invoice of work completed.
  • The terms of the contract or Statement of Work dictate when payments are made, such as upon completion of a task or by periodic amounts. Not typically paid by payroll

Independent Contractor vs Employee Frequently Asked Questions (FAQs)

Below are frequently asked questions regarding the comparison between an independent contractor vs an employee:

Can a worker be both, an independent contractor and an employee?

Yes, a worker can be both an independent contractor and an employee. However, usually not at the same company. It is possible for a worker to be an independent contractor at one company and an employee at another. 

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Do independent contractors or employees get health insurance and other benefits?

If a company hires an independent contractor, they are not required under law to offer them the same health insurance or benefits being offered to employees. However, if the company wants to, there are certain regulations in place that enable it. 

The Affordable Care Act (ACA) does require large employers (50 or more full-time employees) to provide health insurance to 95% of their employees or they must pay a fine. The health insurance offered must meet certain affordability requirements and must cover a minimum set of essential services. 

What are the advantages and disadvantages of being an independent contractor vs. an employee?

There are advantages and disadvantages of being both, an independent contractor and an employee, but it depends on the person’s situation and what they prefer.

Independent Contractor

Advantages:

  • May earn more money than an employee
  • You are your own boss
  • Likely comes with flexibility in terms of working hours

Disadvantages:

  • Lack of job security
  • May find it difficult to find time off
  • Doesn’t come with federal benefits

Employee

Advantages:

  • Guaranteed income
  • Paid Time Off and other benefits
  • Consistency in work duties

Disadvantages

  • You are dependent on the employer to pay you
  • Your income can not go beyond your salary or hourly wage unless given a raise
  • May become bored working under someone else

How can an independent contractor get health insurance coverage?

There are several ways an independent contractor can get health insurance coverage:

Health Saving Accounts (HSA): An HSA is a way to budget and allocates tax-free money that is used to pay for healthcare expenses. If you have a high deductible health insurance plan and are an independent contractor, an HSA may be a good choice for you to consider.

Join a Spouse or Partner’s Plan: If you are in a legal union with your spouse or partner, you may be able to join their health insurance plan. If they have an employer-based insurance plan, you save money due to the fact they most likely charge a lower premium for dependents.

Individual Exchange Marketplace: You can enroll in a Qualified Health Plan through the Exchange Marketplace during the annual Open Enrollment Period, or a Special Enrollment Period if you are eligible.

Alternative Options: Health insurance can be very costly as an independent contractor. However, Mira is just $45 per month and covers in-network urgent care visits, low-cost lab testing, and up to 80% off prescriptions. 

The Bottom Line

There are many differences between independent contractors and employees and it’s important for companies and workers to identify the difference before hiring either. Without knowing what constitutes an employee and making sure you treat both with the correct rights and responsibilities then employers can get themselves into trouble.