Are You an Employee or an Independent Contractor?

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Given the changes in the job market and the decrease in the number of employers hiring full-time workers, it's important to know what your rights are if a company offers you a position as an independent contractor rather than hiring you as an employee.

There are federal and state laws which govern whether an individual is an employee or an independent contractor.

Are You an Employee or an Independent Contractor?

In general, if you're an independent contractor, you are working for yourself, and the company is your client. You are responsible for paying your employment taxes, and you are not entitled to company-provided or government-mandated employee (including medical and/or dental) benefits. You must also carefully track your income for tax reporting purposes, since your clients will not, as a general rule, withhold federal and state taxes.

For example, under most circumstances contractors aren't eligible for unemployment benefits.

When You're an Employee

A worker is considered an employee if the employer controls what work will be done, how it will be done, and when it will be done. What is important is that the company has the right to define, control, and manage these details, to which their personnel must conform.

Employees are on the company payroll, and the employer withholds federal and state taxes, Social Security, and Medicare. Employees are provided with unemployment and workers' compensation insurance. Employees may be offered benefits like paid sick leave, vacation, health insurance, and 401(k) or other retirement plan participation.

When You're an Independent Contractor

The general rule that determines whether someone is an employee or an independent contractor is that an individual is an independent contractor if he decides how and when the work will be done.

Independent contractors aren't told by the company what to do and how to do it. What is important is the end result, and how this is reached is up to the contractor.

Independent contractors typically set their hours and are paid on a freelance basis, either a flat rate or per job rate. The duration of their work, their independent project deadlines, and the details of their pay are determined by a contract signed with their clients before the period of work begins.

Independent contractors are responsible for paying their taxes to the IRS and their state tax department. Independent contractors are not entitled to benefits, even those mandated by law like unemployment and worker's compensation, because they are not employees of a company. They are also solely responsible for securing their own medical, dental, and long-term care insurance.

IRS Employee or Independent Contractor Rules

  • Behavioral - Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial - Are the business aspects of the worker's job controlled by the payer? (These include things like how and when the worker is paid, whether expenses are reimbursed, whether paid vacation or sick leave is offered, who provides tools/supplies, etc.)
  • Type of Relationship - Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

    State Laws

    In addition to the federal guidelines, there are state laws regulating workers. Check your state Department of Labor website for information on the rules in your location.

    Pros and Cons

    There are very different benefits and disadvantages of being either an employee or an independent contractor. Generally, this boils down to an issue of job security versus freedom: As an employee, you will enjoy benefits and (hopefully) the security of knowing that you will have steady employment for the foreseeable future if you do a good job.

    However, you will probably also have to conform to the work schedules, possible overtime requirements, and work settings specified by your employer. Independent contractors, on the other hand, have the freedom to decide when, how, and exactly how much they will work (balancing these decisions with their need to earn enough to support themselves and pay for their healthcare insurance). If you have clients that aren't clear on the boundaries between contractors and employees, there are steps you can take to ensure you're treated fairly and appropriately.

    Read the terms of your contract, whether the organization you work for is an employer or a client, to best be able to make informed decisions about your professional future.