What is the difference between a Contractor and an Employee?

Contractors VS. Employees
Find The Answers To These Contractor Questions, Employee Questions, And Applicaple IRS Form Questions

  • How do you decide if someone working for you is an employee or a contractor?
  • How do you know if you should hire a contractor or an employee?
  • Who do I have to send a 1099 to? Do contractors receive a 1099 misc form? Do employees?
  • What is a W2 Form? What is a W4 Form? What is an I-9 Form?

If you have have made it this far by pouring over countless sites and other sources of information about contractors, employs, and the associated IRS forms, I hope to bring your journey to a swift end. Below I will do my best to answer these questions as quickly and as painlessly as possible. Where possible links will be provided to the resources and information you need to start hiring contractors or employees alike.

Knowing the difference between a contractor and an employee can save you TIME & MONEY! Ultimately it can also save you from several headaches including the fines and penalties that stem from not knowing the difference and following the letter of the law where ever possible!

Employee or Contractor?

  • How do you decide if someone working for you is an employee or a contractor?
  • In short, an employee is someone working under your direct authority in almost all aspects of the job. Here are the primary ways you can tell someone is an employee:

  • You dictate the person’s hours, meaning you decide when they show up for work and when they can leave.
  • The person works on your premises all the time, never working from another location. Or the person works basically in a single location which is your office or building specifically for the purposes of providing a place for people to work.
  • The person has provided you no insurance documents proving they have their own health / liability coverage.
  • You pay the person without receiving an invoice of any kind. (Sometimes this can be true for both contractors and employees)
  • When Hiring an Employee

    When hiring an employee you must have them complete a W-4 Form and an I-9 Form. You can obtain the current year’s IRS Employee forms at http://irs.gov/. Don’t get all worked up, these forms are easy for your employees to fill out, as a matter of fact you have most likely filled these out yourself a time or two in the past. As the employer, you must simply keep these papers on file. You do not have to send them to anyone! Your new hire fills them out, you file them, and forget about it for the time being!

  • What is a W4’s? W4 Forms are for determining tax rates and filing the appropriate taxes for the employee. This form gives you the employees important information, as well as the amount of dependents they are claiming.
  • What is a I9’s? I9 Forms are to prove that you have the right to work in the country. And simply need to be completed properly and stored on file if needed.
  • Do Contractors have to fill out these forms? Absolutely Not! Because contractors are working for themselves, they do not fill out these forms. These forms are employee prerequisite forms exclusively.
  • What is a 1099 Miscellaneous Form? A 1099 Misc Form is what businesses send to contractors at the end of each year. 1099 Forms are easy to fill out and simply require you to put the contractors information such as name, address, and social security number or tax identification number, as well as the total amount of money you have paid to that contractor that year.
  • Do Employees receive a 1099 Misc Form? No ONLY Contractors receive 1099’s!
  • How do I know if other businesses I work with need to receive 1099’s?
  • As a general rule of thumb, when you deal with a Corporation, you do not send 1099’s. This is most easily identified by the title “Incorporated” in the Company’s name. When dealing with a sole proprietor or a limited liability corporation you will most often have to send a 1099 to these people / companies. A sole proprietorship is usually signified by the letters D/B/A meaning “Doing Business As” following by the individual’s business name. A limited liability corporation is denoted by the term “LLC” in the business’s name.

    Hire an Employee or a Contractor?

    Before you get started deciding whether you want to hire an employee or a contractor be sure you understand the differences stated above. Remember that 9 to 5 desk workers are not generally considered contractors, and always employees.

    • Now, should you hire a contractor or an employee?

    There are several differences between the two types of employment. When someone works for you as an employee there are several burdens placed upon you the employer. You must pay on the employee’s behalf as well as match certain state and federal taxes, report your newly hired employee, and maintain insurance in case of injury to your employees.

    When dealing with contractors the roles are somewhat reversed. Instead of you withholding taxes, and contributing your matching taxes, you simply pay all monies to be payed to the contractor. At this point the contractor is responsible to pay their own tax payments on their own. They receive the full payment amount, without deducting any taxes. The contractor will pay the taxes to the IRS themselves. Similarly you do not have to have the same insurance you need for employees. As a matter of fact, you don’t need any insurance at all for the contractor. When you first do business with a new contractor, that contractor should provide you with proof of insurance in case of accident or injury on the job. Each contractor must pay for their own insurance for this purpose, and it is your job to maintain a current copy of valid insurance documentation for each contractor at all times.

    Hopefully after reading this you have a better understanding of the differences between hiring an employee and hiring a contractor. Use this information to better understand the way employees and contractors work and which type of employment would be right for you, or for those you plan to hire.

    Leave a Reply

    Your email address will not be published. Required fields are marked *