While employees and contractors alike may perform work for a particular company, the terms actually refer to very different types of employment. Also, the way a business classifies you plays a big role in how you pay taxes and whether you get certain benefits, among other implications. Thus, any company you fully work for must understand which employment category you fall under.
In some cases, businesses may attempt to classify you as an independent contractor even if you do not fit the criteria for doing so. Why? Having contractors, as opposed to traditional employees, may benefit companies in some ways because they do not have to pay unemployment or workers’ compensation for contract workers. In other words, intentionally misclassifying workers may lead to lower employment costs until the government becomes aware of the issue. Just how might you tell if you are actually an independent contractor or a traditional employee?
When deciding how to classify you, a company is typically going to ask itself several important questions relating to your employment terms. Does that company tell you when, where and how to do your job? Does it control when you receive payment and reimbursement for business expenses? Does the company offer you employment benefits, such as paid time off? Is your work a key component of the business? How a company answers these questions should help determine how it classifies you.
Ultimately, the more control a company has over a worker, the less likely he or she probably is to be an independent contractor. Other notable differences include the fact that labor and employment laws do not cover independent contractors, and that independent contractors file taxes using a Form 1099, as opposed to a W-2.
Companies that misclassify workers may find themselves in serious hot water. If you suspect that a company may have given you the wrong classification, you must get to the bottom of things.