Which Is Better: Employee Or Independent Contractor?
Which Is Better: Employee Or Independent Contractor?
recently picked up and moved her life across the country to take a job
with a start-up company. Though the move was risky, the ability was too
amazing to give up. Cliff Davis Tampa FL
she was hired as a full-time employee, but eight months later, the
organization changed her role compared to that of an independent
contractor. For me, this raised two questions: Is it better for a worker
to speculate as an independent contractor or possibly a regular
employee? And why might a manager choose one over the other?
the last 40 years, Congress has gone by several laws that outline the
distinctions between employees and independent contractors in relation
to their compensation, benefits and relationships on their employers.
Section 530 of the Revenue Act of 1978 laid your initial groundwork for
the regulations we follow today.
In the 1960s and early 1970s,
there was a growing concern money for hard times of the Social Security
program. Some blamed the funding issue on independent contractors
skimping on self-employment tax. This perception led to an increase in
audits by the Internal Revenue Service. This, therefore, led to
criticism the IRS was too aggressive in classifying workers as
employees, instead of as self-employed independent contractors, which
applied its criteria inconsistently. Congress responded by enacting
Section 530, providing safe harbor for employers by preventing the
government from retroactively reclassifying independent contractors as
employees. Section 530 protected employers from large penalties and back
taxes after they met the law's standards.
To ensure employers to
be eligible for a safe harbor under Section 530, the IRS required: a
reasonable grounds for treating the workers as independent contractors;
consistency in the manner such workers were treated; and proper tax
reporting using 1099 forms for the people categorized as contractors.
Though Section 530 was first intended to be an interim measure for that
audit issue of the '60s and '70s, it took over as enduring baseline for
today's worker classification regulations. Subsequent legislation, such
as the Small Business Job Protection Act of 1996, further clarified the
word what in Section 530, plus the rules of safe harbor availability as
well as the question of who holds the burden of proof for
Many employers utilize the following rule of
thumb to distinguish between a contractor and an employee: If an
employer has the right to control the means by which the worker performs
his / her services and the ends that work well produces, the worker is
regarded as an employee. In 1987, the government released a 20-factor
list, based on prior cases and rulings, to aid employers resolve some of
the "gray areas" that this rule won't resolve. Some of the factors
included on the list were: training; set hours of training; payment by
the hour, week or month; furnishing tools or materials; carrying out
work on the employer's premises; and payment of economic expenses.
example, in the event the employer requires the worker to go through a
training class before starting work, or to use particular tools or
materials the employer provides, the worker would qualify as an
employee. Similarly, in the event the employer requests the worker be on
site with the company headquarters from 8 a.m. to p.m. on a daily
basis, the worker is an employee, not an independent contractor.
overarching theme of these factors is that a business has the right to
control how a staff produces his or her work. When employing an
independent contractor, the employer gives up this control. Independent
contractors have a strong focus on the end result, not the process to
accomplish the project. Overall, the IRS' 20-factor list helped many
employers produce a baseline to evaluate the role of their hires and
In 1996, the internal revenue service
took the list a measure further by identifying three broad groups of
evidence to be used in discriminating between a staff member and an
independent contractor. The three categories are behavioral control,
financial control and relationship in the parties. In general, employers
are only able to minimally regulate contractors' behavior. Contractors
have the freedom to subcontract the work they receive, complete the task
in the way they feel is best, and set their own hours and work
Financial control implies that contractors' payment
standard is founded on a "per task" or "piece work" pay. Therefore, how
much time and energy contractors expend around the work they produce is
up to the contractors, not their employers. As opposed, employees are
typically paid per hour wage or a salary, which their employers monitor
and control, with the number of hours worked. Employees could also
receive additional benefits, such as health coverage or retirement
plans, which independent contractors tend not to receive.
third category, relationship in the parties, refers to the increasing
practice of employers requiring employees to sign non-compete clauses or
non-disclosure agreements. Generally, independent contractors are not
required to sign such legal contracts. Contractors can function with
multiple employers if they so choose - even competing employers. A
company does not have the right to control the relationships an
independent contractor may develop away from their work for that
The legal distinction employees and
contractors is obvious. Why, then, would a staff or an employer prefer
one situation in the other? There is no right or wrong answer when it
comes to a contractor or employee role, merely preferences for each and
An independent contractor enjoys more
flexibility when compared to a full-time employee. The contractor can
essentially be their own boss, by developing their own schedule, working
without close supervision, and dealing with as heavy or light a
workload because he sees fit. This allows open-ended earnings potential.
Doing work for multiple employers also gives contractors more job
security in one sense, because one employer breaking the bank or cutting
back on staff will not destroy the contractor's whole stream of income.
For an employee, conversely, it may be more appealing to possess a
predictable schedule, the chance for advancement, along with a more
stable income flow.
From an employer's perspective, an impartial
contractor may be a good fit in the event the employer does not have the
time or manpower to pay, monitor or make use of an employee full time.
The business may simply need you to definitely complete projects with an
occasional basis. On the other hand, if an employer would rather
maintain close supervision as well as a worker who is on a regular and
predictable basis, and when the employer has the means to pay the worker
a reliable salary or hourly wage, then hiring the worker as an employee
would be a more logical decision.
Employers and workers should
also weigh factors like taxes, health care and retirement benefits
within their decisions. When hiring an independent contractor, the
employer does not pay the worker's taxes; rather, independent
contractors have the effect of paying the tax themselves with the
self-employment tax on Schedule SE, which takes care of their Medicare
and Social Security tax. An employer withholds the equivalent tax from a
worker's paycheck. Contractors can deduct the employer-equivalent area
of the self-employment tax when calculating their adjusted revenues.
However, this deduction only affects taxation, not self-employment tax.
All self-employment salary is then reported on Schedule C.
employers are accountable for providing a 1099 form to contractors for
his or her income reporting on Schedule C, specifically for income
amounts over $600. However, the duty falls on the contractor to maintain
accurate records, whether or not they received the tax forms or proper
documentation. Independent contractors must also be conscious of making
estimated tax payments all through the year, which can be a challenge
when salary is not as steady as a possible employee's would be. And when
they purchase equipment or materials, or utilize a home office for
work, independent contractors must track their expenses to be able to be
Independent contractors deduct their business
expenses directly against their business receipts, reporting the
knowledge on Schedule C of Form 1040. Employees sometimes incur
unreimbursed business expenses too, such as for tools or union dues.
Employees get less favorable treatment, handling such expenses as
miscellaneous itemized deductions on Schedule A. Most such expenses are
deductible provided that they exceed 2 percent with the employee's
adjusted revenues. Overall, independent contractors face a much more
complex tax situation, even when it is sometimes more favorable.
current passage of the Affordable Care Act raised concern and
uncertainty regarding which insurance and care programs will likely be
available to independent contractors as well as to those seeking
individual coverage. Natural meats see a change, too, with what options
employers will give you for their employees down the road, particularly
within company-sponsored group plans. The complication and uncertainty
of the new health care landscape will take some time to play out, for
independent contractors and employees alike.
workers should think about the impact of operating as an independent
contractor or just as one employee on their retirement planning. Many
employers provide access to 401(k) plans or profit sharing plans, which
assist employees in saving for their retirement (in addition to
individual saving they will often pursue via IRA or Roth IRA accounts).
Independent contractors should save for their retirement positioned on
their own. Though certainly manageable, this arrangement places greater
responsibility on independent contractors to ensure not only that they
save enough, but also that they follow regulations include them as
contributing properly. Otherwise, they may end up paying penalties for
overcontributing or causing the wrong type of account, based on their
Thinking about the pros and cons of each kind of
work, I come back to my original question. Maybe it was better for my
friend to wind up as an independent contractor as opposed to an
employee? Maybe. The progres offered her flexible working hours, less
supervision and the opportunity to contract with other companies, with
the resulting possibility of additional income. In exchange, she lost a
well balanced salary, as well as her health insurance retirement
benefits. On your own who can say when the trade was worthwhile is my
good friend. As for why the start-up company preferred her being a
contractor, I can only speculate. My instincts repeat the primary factor
was probably cost. By cutting health insurance and retirement benefits
and paying her piecemeal, they'll likely save money, allowing them to
put more funds into the young firm. Cliff Davis Tampa FL