Independent Contractor or an Employee – What’s the Difference?

Increasingly, many people want to fulfill a lifelong dream: being their own boss. But before they trade their employee status for that of an independent contractor, they need to know at least the basics of each.

Generally, an employer-employee relationship exists if a worker performs services that can be legally controlled by an employer, such as what will be done and how it will be done, even if the worker is given freedom of action. An individual is an independent contractor if the person paying him has the right to control or direct only the result of the work and not what will be done and how it will be done.

Employee

Employees enjoy certain perks, even some that they aren’t always aware of. They usually enjoy a relatively steady income and do not have to provide their own equipment, tools and supplies to do their job. Their employer is responsible for marketing, bringing in business, providing work for them to do and paying them regularly.

Employees may be eligible for employer-sponsored benefit plans including health, life, dental and vision insurance and retirement benefits, if their employer chooses to offer them. They may also receive paid time off in the form of annual, sick leave, personal, and bereavement leave, and also receive certain paid holidays off each year. Employers may also pay for employee training, travel, and memberships to professional organizations.

Although employees pay taxes, their employers withhold federal income tax, Social Security, unemployment, and Medicare taxes from their wages. Employers also pay workers compensation insurance premiums and provide a match to the amount of Social Security and Medicare taxes paid by employees.

Employees usually do not have a tremendous amount of freedom, cannot set their own schedules, decide what work they want to do (and what they don’t), and give themselves a raise when they feel they deserve it. In most states, they are employed at-will, meaning that they can be terminated or have their pay or benefits cut by their employer at any time for any reason except an illegal one, with no legal consequences to the employer. North Dakota, as an example, is an at-will state.

Independent Contractor 

The main advantages to being an independent contractor are independence and control. Independent contractors are able to set their own work hours, rates, and accept or decline work according to their preferences and schedule.

Although they must handle their own marketing and promotion, find their own clients, and ultimately build their own businesses, independent contractors typically have more control over their income than employees since they are their own bosses and can independently decide to raise their rates, cut their expenses, take on more work, and ramp up their marketing efforts when necessary. Unlike employees, who usually have minimal tax write-offs, independent contractors can deduct many of their business-related expenses, including travel, vehicles, equipment, utilities, and supply costs.

Because independent contractors do not have employers to withhold federal income tax, Social Security, and Medicare taxes from their earnings for them, they must handle those responsibilities on their own. An independent contractor’s earnings are subject to self-employment tax, which is basically Social Security and Medicare tax without the employer match.

Independent contractors must buy their own health insurance and fund their own retirement plans, and do not receive paid holidays, vacation, or sick leave. They must also buy their own equipment and supplies and pay their own travel expenses, although many of these costs can be written off on their tax return each year.

Which is Better?

Whether a worker is better suited to be an employee or an independent contractor depends on their individual strengths and weaknesses. For highly motivated self-starters who don’t need (or want) a boss to report to, self-employment can be an excellent choice. But for those who function better with a set schedule and don’t want to deal with marketing, taxes, and business records, an employee status might be the right fit.

If you have questions about your status as either an employee or an independent contractor, contact a business lawyer at O’Keeffe O’Brien Lyson Attorneys online or call 701-235-8000 (toll-free 877-235-8000) today.

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