Employees vs Contractors: What You Need To Know

So you own a small business but you’re not sure whether to classify your staff as an employee or contractor? The IRS considers these two as different classifications. Let’s take a look at how the IRS defines them.

What are the differences between an employee and contractor?

Distinguishing between an employee and a contractor can vary based on a few simple differences.

Employees and Contractors
Employees and Contractors

The IRS considers an individual a contractor if the payer controls or directs only the result of the work, not what and how it’s done.

By contrast, a worker is someone in which “the business has the right to direct and control the work performed.”

A few separate factors are also considered when determining the difference between a worker and a contractor. The IRS generally defines a worker based on these guideline:

  • Behavioral Control – If the business has a right to control the work performed based on instructions, evaluations and training
  • Financial Control – if the business has a control in the financial aspects of the job such as equipment, reimbursements etc
  • Relationship – how the worker and business perceive their interaction with one another with respect to contracts, benefits, vacation, pensions, etc

Are There Consequences For Misclassifying An Employee Or Contractor?

Classifying an employee as an independent contractor incorrectly causes employers to be liable for employment taxes. 

If a worker feels that an employer has incorrectly classified them, they have recourse. They can file Form 8919 to determine the employees share of any uncollected Social Security and Medicare taxes due.

PayWow is designed to help prevent these mistakes. Our software allows employers to provide access to their employees or contractors via myPayWow. They can then fill out onboarding and tax documents, streamlining your process and reducing errors with the IRS.

Contact us today and see how we can help manage your payroll!

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