We’ve talked before about why it’s so important to know the difference between an employee and an independent contractor (and the penalties for getting this wrong). But as I was deciding what this week’s blog post should be, I realized…we didn’t really discuss what is the difference between an employee and an independent contractor? As year-end approaches and you start making strategic plans for next year, it’s critical that you know how to make this determination.
The IRS considers a worker an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” If you think about it, this makes sense. An independent contractor must be “independent.” If you are telling a worker what to do, when to do it, where to do it, and how to do it, they’re not an independent contractor. They’re an employee. Even if the worker has some level of discretion (as most professionals do in this day and age), the key is whether or not you as the employer have the legal right to control what is being done and how it’s being done. In other words, are you paying the worker to accomplish a result, or are you paying the worker to perform a list of duties and responsibilities)?
Are you paying the worker to accomplish a result or to perform a list of duties and responsibilities?
Of course, like most things in the practice of law, it’s never as simple as results vs details. The IRS is cracking down on misclassification, and with the growth of the so-called gig economy, some states are even passing legislation to treat more workers as employees. The ultimate answer to the question “what’s the difference between an employee and an independent contractor” is it depends on the specific facts in your situation. How’s that for a lawyer answer?
The Factors to Consider
So when deciding whether or not a new worker is an employee or an independent contractor, you really do have to consider all of the facts and circumstances to determine which role seems to fit better. Given the penalties for getting it wrong, it’s better to err on the side of caution and treat workers that you aren’t sure about as employees than to just assume you can get away with making every worker an independent contractor.
For more, check out our recent webinar on this topic, or schedule a consultation to discuss the specifics of your situation.