How Do You Differentiate Employees and Contractors?

How Do You Differentiate Employees and Contractors?

If you’re unsure whether to hire an employee or have a contractor, this article will guide you on differentiating both. The article will differentiate both in terms of the scope of work, dependency factors, legal forms required, and financial investment. Both employees and contractors have the ability to perform necessary tasks, but contractors are more independent in terms of material, equipment, and time. 

Dependency Factor

Employers have minimal control of how contractors should perform the job, as long as the result provided is what was requested. On the contrary, employers have full control of employees from processes to results.

Independent contractors most often own the equipment, materials, and supplies needed to perform a particular task. Some examples of equipment and material could be computers, forms, construction tools and materials, and sometimes an office space. Contrary to contractors, employees have most if not all equipment and materials provided to them by the employer. A conceptual way to understand is that contractors can fully complete the job independently, while employees most frequently will be unable to complete the task without the supervision of their employer. 

The IRS defines characteristics to differentiate contractors from employees. Click this link for employees, and this link for contractors.

Forms Requested 

In terms of compliance, the employee and contractor have different forms to file in order to comply with the state government. 

It is critical that companies request a W-9 filed form from any contractor before proceeding with any type of engagement and payment. The IRS provides the instructions here to guide contractors filing the form. 

On the other hand, employees are requested to fill out the W-4 for federal withholding and I-9 for immigration eligibility.

Budget Allocation

Employees are consistently paid depending on payroll pay frequency, but contractors are usually paid on a project basis. 

Hiring employees requires a consistent investment due to the tax compliance and the quarterly payroll returns that need to be filed with the state government. Businesses should know that they will need to pay additional taxes when hiring individuals on payroll. Alternatively, there is no tax withheld from businesses when they make a payment to contractors, which financially costs them less in the short-term. 

There is no better or worse in deciding whether a business should hire employees or sign contractors. Businesses should decide based on the goals that they are trying to achieve and the frequency of their projects. Some businesses have intense projects based on seasons, but others will have the same projects permanently. 
Eneya Accounting is available to assist your business with payroll recording and contractor forms for any given season. Contact us at 949-529-0740, or schedule your consultation via this link.