Do you know the difference between an independent contractor and an employee? And why it matters for employers? The distinction has been the subject of much debate and litigation in California in recent years.
Employees work exclusively (typically) for an employer and are paid wages recorded on a W-2 for tax purposes, including withholdings for taxes, social security, etc.
An independent contractor works for themselves and is paid through a 1099 form with no tax withholding.
Why is this important? In California, an employer can get into trouble for misclassifying employees as independent contractors and be subject to penalties and fines. Misclassified workers may otherwise be eligible for overtime, sick pay, or other benefits mandated by law.
How do you know how to classify? The IRS has a 20-factor list to identify if a person is properly classified as an independent contractor. Most of the factors address the level of control exerted by the employer over the manner and timing of the job done by the person. Is the person engaging in the same type of work as the employer’s business? Where is the work completed? Is it project work or a long-term relationship? How is payment made? Is the work exclusive?
In addition to analyzing these factors, it is important to have a written agreement with independent contractors to clarify the scope and terms of the relationship.