How to Tell the Difference: Independent Contractor or Employee

employee signing a contract

Understanding the difference is important for both employees and employers.

It is more important than ever to understand the difference between 1099 Independent Contractors and W-2 employment who work on a contract basis. All too often, we hear both types of worker referred to simply as “contractors.” However, there are key differences.

Independent Contractors are truly independent, and as such, no one is paying the employer share of their employment taxes such as Social Security and Medicare. They are also not protected by Workers Compensation or Unemployment Insurance. They do not have access to employer-sponsored benefits plans. In a nutshell, they are an independent business providing a service to another business. Contract workers are different. They are always W-2 employees working on a contract basis, meaning that they are often hired to work on a specific project or for a specific amount of time. Client companies often hire on a contract basis because they have work that needs to be completed, but they do not want to permanently add to their headcount.

Contract workers are different. They are always W-2 employees working on a contract basis, meaning that they are often hired to work on a specific project or for a specific amount of time. Client companies often hire on a contract basis because they have work that needs to be completed, but they do not want to permanently add to their headcount.

All too often however, contract workers are slapped with the label “Independent Contractor” so that the company they are working for can avoid paying taxes and other employment costs on these workers. But those workers are performing the same work and are expected to abide by the same policies as their full-time, regular employees. Obviously, this is costing the government revenue in the way of tax dollars, and they have been cracking down.

The IRS has outlined a six-factor economic realities test for determining correct worker classification to refer to whenever you or a client company are in doubt about whether a candidate should be a W-2 Employee or Independent Contractor.

So, What's the Difference?

The major difference to remember between those contract workers and Independent Contractors is that the contractors are actually W-2 employees, but they are employed by a staffing agency or a back-office service provider such as Visium Resources instead of by the company they are performing work for. By using staffing agencies like Visium, the client company can still avoid many of the costs, administrative issues, and hassles that come with hiring permanent employees while not exposing themselves to the risk of misclassifying someone as an independent contractor.

Working as a contract worker can be a great benefit for the employee as well.  They are employed as W-2 contractors and should enjoy all of the benefits of a regular employee if they are employed by a reputable back-office service provider or staffing agency. For example, Visium Resources pays the employer share of taxes for all of our contractors, makes sure they are protected by Workers’ Comp and Unemployment Insurance, and offers many benefits, including healthcare insurance. Plus, contracting can offer these workers more flexibility, more work-life balance, the opportunity to travel, and more. In many cases, our employees prefer contracting to direct-hire positions.

While misclassification of workers can be a serious issue at tax-time, we have good news those clients who may have accidentally misclassified workers as Independent Contractors. We can help to make things right by transitioning those misclassified employees to working on a contract basis. You would be able to outsource the actual employment of those employees to a solutions provider, such as Visium Resources, which will serve as the W-2 employer, handling the payroll, taxes, benefits administration, and more.

If you would like more information on contract workers, contact Visium Resources today. We will always be here for you!

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