Spot the Difference: Independent Contractors vs. Employees

Business owners know that it is necessary to have people performing work on their behalf in order to get everything done. There are many ways to bring people on to help accomplish all the necessary tasks. Two of the most common options are to hire on employees (either full time or part time) and to bring in independent contractors to complete work. As an employer, it is important to know the difference between these two options, and choose the right one in a given situation because of the tax and legal implications.

Why is it Important?

The status of someone who you bring in to do work for your business will have a direct impact on how you pay them and how they pay their taxes. An employee who works directly for your business, for example, will be paid either based on a salary or an hourly wage. Your business will withhold taxes on their behalf, and issue W-2s or other forms to the IRS and Washington’s Dept. of Labor & Industries (LNI) and Employment Security Dept (ESD). For independent contractors, on the other hand, none of this is necessary. The contractor doing the work will be responsible for taking care of all of this on their own.

Determining Classification

Employers don’t simply get to choose whether someone is an employee or an independent contractor. Instead, they must follow the laws and regulations issued by state and federal governments, the IRS, and other agencies. The following are the main factors that are considered when determining how to classify someone working for a company:

  • Control over work methods – If an employer instructs the person doing work on things like what hours they work, what tools they need to use, and the steps that must be followed to complete a task, they are typically going to be an employee. If the employer simply states what the end outcome needs to be and allows the workers to complete it as they see fit, the people doing the work are likely independent contractors.
  • Control over other opportunities – An employer will typically have some type of restriction on whether an employee can work for other companies, but they won’t have this same type of control over independent contractors.
  • Type of work – Those who do “core” work for a company are generally going to be classified as employees. Those who do “support” work can be either employees or contractors. For example, a credit union will often hire personal bankers as employees, but have the janitorial staff be brought in as independent contractors.
  • Default classification – According to the IRS, the “default” classification for someone doing work for a company is going to be an employee. A company must be able to justify a decision to have someone working as an independent contractor.

In Washington, LNI has a six-point test they use to determine whether a worker is an independent contractor or employee.  Although the criteria used by LNI is similar to that of the IRS, it is more comprehensive.  

Further, if you are a construction contractor using independent contractors rather than true subcontractors, the independent contractor must meet the six-point test in addition to a 7th-the independent contractor must be a registered contractor with LNI.  If this criteria isn’t met, your firm is not only liable for back payroll taxes including Worker’s Compensation premiums, but also the amount of benefits paid to the worker in the event they are injured and make a claim to LNI.  More information can be found at www.lni.wa.gov.

These concepts are looked at carefully when determining how an employee should be classified. The IRS or LNI can audit employers to determine whether workers are improperly classified and need to be changed. The results of such an audit, if independent contractors are found to be employees, can include payment of back-payroll taxes, fines and penalties.

Get the Help You Need

If you are bringing people on to do work with your company, it is important to evaluate how they will be classified. Whether you are hiring employees or bringing on contractors, having the proper paperwork in place is absolutely essential. Contact us to help determine how workers should be classified in the state of Washington and ensure all the proper paperwork is in place.

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone

Written by APH Law PLLC

APH Law PLLC

When we founded APH Law PLLC in 2010, we did so out of a desire to connect business owners with more and better opportunities. No matter what industry you’re operating in, creating a strong foundation, preparing for the future, and protecting against challenges are key to long-term success. It is this kind of support that we take tremendous pride in helping businesses.