Differences Between Independent Contractors and Employees

As of 2023, roughly 16.5 million people, about 10.1% of the workforce, are self-employed. Independent contractors enjoy flexibility, allowing them to set their own hours and be their own boss. While people may marvel at the freedom that comes with being self-employed, being an independent contractor comes with some major financial drawbacks.

If you are a business owner, our Harrisburg employment law attorneys would like to inform you of the factors that are examined in determining whether a worker is an employee or an independent contractor.

How Do I Decide if a Worker is an Employee or Independent Contractor?

The Internal Revenue Service uses the following three categories to determine whether a worker is an employee or independent contractor:

Behavioral

Does the company control what the worker does and how the worker completes job tasks? If the business gives a worker more detailed instructions, then the worker is likely an employee.

However, some jobs do require less instruction than others, so if the employer retains the right to control how the work is produced, then the worker is likely an employee. If the business has given up the right to control the work results, then the worker is likely an independent contractor.

If the business provides training, this indicates that the employer wants the job completed in a certain manner. If there is an evaluation system measuring how the work is being performed, then this is a sign that the worker is an employee.

Financial

Is the worker free to market their services? If so, the worker is most likely an independent contractor. Employees typically agree to work on a regular basis for a single employer.

Is the worker paid an hourly or flat fee? Generally, workers who are paid hourly or by the day are employees, while independent contractors are paid a flat fee per project.

Is the worker reimbursed for tools and supplies? If the worker invests in equipment, then the individual will probably be classified as an independent contractor. If a worker puts forth the money for equipment but is reimbursed, the individual is most likely considered an employee. An industry that strays from this standard is construction. Even though many construction workers spend thousands of dollars on supplies, they are typically considered employees by the IRS.

Type of Relationship

If a worker is offered health insurance, pension plans, disability insurance, paid time off, and other benefits, then the person is generally an employee. Additionally, if the employer and worker expect the relationship to last some time (not just the length of one assignment or project), then this is an indication that the worker is an employee.

Federal Payroll Tax

An independent contractor must fund the entirety of their Medicare and Social Security taxes (federal payroll tax). The federal payroll tax, commonly known as FICA, is 15.3% of an independent contractor’s net income. This breaks down to a self-employment tax of 12.4% for Social Security and 2.9% for Medicare. In contrast, employees only contribute 6.2% of their paycheck to Social Security and 1.45% to Medicare, with their employer contributing the other half.

Speak with a Harrisburg Employment Law Attorney at Your Earliest Convenience

If you are considering hiring extra help or are unsure how to classify your current workers, you should speak with a Harrisburg employment law attorney. We know that employment matters can be overwhelming. Nobody wants to owe back taxes, but that may be the situation if a worker misclassification occurs.

At Mette Attorneys at Law, our legal team is devoted to answering your employment questions in an easy-to-understand manner. To learn how we can help your business, contact us online or call our office.