By: Diana Grandoni, Maine SBDC Graduate Assistant
The important differences between these two roles might surprise you.
Specific standards determine if your worker is legally an independent contractor or an employee of your business, and it’s up to the business owner to make sure these relationships are classified correctly.
A worker should be considered an employee if they are specifically directed by the business. If the worker is subject to the business’s instructions about when, where, and how to work, what equipment to use, where to purchase supplies, or what sequence to follow when performing the work, they are an employee. If the worker gets training on how to do the job or on-going training on procedures, they are likely an employee, whereas contractors usually have their own way of getting the job done. An employee is given detailed instruction, while an independent contractor gets less instruction and completes the work autonomously.
The personal financial investment involved often determines the nature of the worker relationship. If the individual has a significant personal financial investment in tools or equipment, regularly has unreimbursed expenses associated with the job, or has the possibility of incurring a financial loss, they are more likely a contractor than an employee. Contractors are usually paid a flat fee when the job is complete, while employees are paid a salary or by the hour.
Contractors usually don’t receive benefits beyond the fee for their service. The lack of health care, vacation, or sick leave benefits provided to the worker does not necessarily mean they are an independent contractor, but businesses generally do not grant benefits beyond pay to non-employees.
Consider the timeline you agree to. The expectation of employees is that that the relationship will continue indefinitely, while a contractor is hired for a specific project or period.
The relative importance of their assigned tasks can help you decide. If the work this person does is a key aspect of the business, it is more likely that the business will have the right to direct and control the worker’s activities, making them an employee.
The IRS has a comprehensive 20 question checklist to help you make the important distinction between employees and independent contractors. More information about these two roles can be found on the IRS website.
Set up a free meeting with one of our advisors to discuss your worker relationships and receive guidance on classifying your workers.