What Is the Difference Between an Employee and an Independent Contractor?

The difference between an employee and an independent contractor can have costly consequences for a misclassified worker.

What is an independent contractor?

Sometimes called freelancers, independent contractors are people or businesses hired to perform a service on a temporary basis or some other non-employment status. Independent contractors must pay their own Social Security and Medicare taxes and are not covered by legal protections that many employees enjoy, such as overtime wages and minimum wage requirements.

What are differences between an employee and independent contractor?

Compared to a traditional employee, independent contractors generally are allowed to conduct their work on their own time and methods.

One of the main differences between an employee and independent contractor is the level of control employers have over them. An independent contractor generally has discretion to choose the means by which they’ll get their job done. Employers can dictate their employees’ schedules, whereas independent contractors typically have much more flexibility.

These benefits of being a contractor may not outweigh the drawbacks, however. Even though independent contractors have more flexible schedules, they are not provided the same benefits as employees. This includes Social Security and Medicare contributions, employer sponsored retirement plans like a 401(k) or IRA, and providing equipment necessary to complete the work.

Independent contractors must provide benefits for themselves while being ineligible for unemployment insurance or worker’s compensation benefits. Furthermore, independent contractors are often able to work remotely while employees typically have to be on site.

How is the pay different between an employee and independent contractor?

Employees are paid on either an hourly basis or yearly salary, and sometimes a combination between commission and hourly rates. Non-exempt employees are covered by minimum wage benefits, including getting paid one-and-a-half-times their hourly rate in overtime if they work over 40 hours a week. Independent contractors are typically paid per project, but could be paid on an hourly rate as well depending on the employer.

It is important for businesses to make a correct distinction between an employee and independent contractor, because it impacts how the company and workers pay taxes. Independent contractors are responsible for paying all their own federal taxes.

What kinds of workers are independent contractors?

Independent contractors vary in salary and occupation, from laborers to professional positions like doctors or dentists. This is because professionals like doctors, dentists, veterinarians, and layers provide independent services to their clients, and are therefore considered independent contractors by the IRS.

In the gig economy, companies everywhere have adopted the practice of categorizing their workers as independent contractors, regardless of the type of work.

How does the FLSA define the differences between an employee and independent contractor?

At the federal level, requirements of the Fair Labor Standards Act (FLSA) determine whether a worker is an employee or a contractor. There’s no specific test for determining the difference. Instead, federal law provides several factors that should be considered:

• The worker’s opportunity for profits or loss
• How much the worker has to invest in facilities and equipment
• Whether or not the worker’s position is permanent
• Whether the services rendered by the worker are an integral part of the business’ operations
• How much the worker faces open-market competition with others who do the same work

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Even if you are classified as an independent contractor, you may be entitled to minimum wage, overtime pay, reimbursement for expenses, and meal and rest breaks, among other employee benefits.

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This article is not legal advice. It is presented 
for informational purposes only.