One of the major defining factors between an employee and an independent contractor is the amount of control that an employer has. A person can be considered an employee when his employer has a certain level of control and direction over how he works. An independent contractor may provide services for an employer, but the employer has less control over the means and methods of the work achieved.
One example to show the difference between an employee and an independent contractor can be the hours that are worked. An employee may have a set number of hours in which she works, say 9 a.m. to 5 p.m., for which she is paid a certain amount by the hour. The independent contractor, however, can be stated a fixed fee by the employer regardless of how many hours it takes to achieve the task.
The employer has little say in how long a task takes for the independent contractor to complete. The employer also does not have much say in the methods that the independent contractor uses to achieve the task, although there are usually guidelines set out by the employer regarding the work to be done. An employee is usually bound by a lot more rules and regulations regarding the time and methods used to complete a task.
Financial considerations are another main difference between the employee and the independent contractor. An independent contractor is responsible for paying her own income tax. When a worker is an employee, then the employer is required to pay his personal income tax. The employer must also pay unemployment taxes on the wages that are paid to an employee.
An employer has to provide a form showing the employee's total earnings and the amount that has been withheld from the employee's pay. Independent contractors hold the responsibility of paying their own federal income tax. They also have the responsibility of paying their own self employment tax.
The Internal Revenue Service uses three main factors to define the difference between an employee and an independent contractor. These three factors all rest on the level of control and independence that exists between employer and worker. The three main factors are behavioral control, financial control and type of relationship.
Behavioral control includes the control that an employer has over a worker's methods, as well as the amount of training and instruction that the employer provides. Financial control covers aspects including the worker's investment in the business and how the worker receives his payment. Financial control also covers whether the worker has unreimbursed business expenses.
The type of relationship factor includes written contracts drawn up between both parties and how permanent the relationship between the parties is. This factor also includes whether employee benefits such as insurance and sick pay are available to the worker. These guidelines are often used in compensation court appeals in determining the difference between an employee and an independent contractor.