What is the Difference Between an Employee and a Contracted Worker?

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Outsourced services are on the rise, which means that many business owners are facing the decision of hiring a contractor or employee when work needs to be completed. It is essential that you understand the classifications of a worker and an employee so that you can manage contractor invoices and payroll while following the legal requirements.

Not only does the distinction of classification affect how the person is paid, but this classification also plays a role in the way the person pays taxes.

Mark Rowley, Owner
RandR Payroll Services

Employee vs. Contractor

The IRS has guidelines that distinguish between the worker classifications. Here is a general overview to help you understand the differences:

  • Employee: The person works under the direction of the employer, which means that a consistent schedule is often maintained. If the employer dictates the workflow and work hours, then the person should be classified as an employee. For example, an employer might direct the daily work tasks, determine specific tasks that need to be completed, request the use of tools that should be used, and oversees how the work is done.
  • Contractor: On the other hand, a contractor works with little direction and minimal training from the company. The payment is based on work that is delivered, not on the way the work is completed. A contractor is considered an independent business owner, which means that the person is selling services.

Payroll Considerations for Employees and Contractors

  • Employees: Paid on a salary or hourly basis, which means that overtime needs to be considered based on the hours that are worked. Taxes are withheld on their income; then they receive a W2 form at the end of the year to use for tax filing. Not only does your business need to withhold the taxes, but FICA payments also need to be paid.
  • Contractor: When someone is hired as an independent contractor, then your company is not required to withhold any taxes. The tax payments must be paid by the contractor in the form of self-employment taxes. Contractors should be provided with 1099-MISC forms at the end of the year to show the payments that were received.

If you have questions about classifications of employees or the right way to process payroll, then it is essential that you enlist the help of an experienced team. For more information or assistance with payroll processing, you can call the experts at R&R Payroll & Bookkeeping Services: (951) 296-0412.