Independent Contractors vs. Employees: Keeping Them Straight

When the IRS looks at the contractors your business works with, it's looking for any signs that a contractor is misclassified. If there's even a sign that someone you're paying as a contractor might actually be classified as an employee, the IRS will reclassify him as such. That sort of decision can prove very expensive for a business owner: there are fines and penalties associated with the process, as well as a requirement that the business owner pay back payroll taxes.

Contractors Versus Employees

For the IRS, telling the difference between a contractor and employee is a matter of determining just how independent the individual is from the company he's working for.

An independent contractor is not under the 'employer's' control. An independent contractor negotiates their rate of pay, can set their own schedule, can refuse work or projects, provides an invoice on their letterhead for services performed, often works for other people, uses their own supplies, may get reimbursed for expenses, usually works on a project by project basis rather than for an indefinite period. When an independent contractors services are terminated, they are not eligible for unemployment benefits. To keep out of trouble and learn more (click here).