Employed or Contracted?
Employed or Contracted?
The business world is a limitless field of potential employment and advancement. With so many opportunities presented to us, some complications and confusion can naturally occur. This can hold true for both the employee and the employer. Inquires can come up such as the common questions of advancement, pay increases, and job security. Another question that may not get asked as often is the question of rather or not either you or someone else should be classified as an employee or an independent contractor.
By now everyone should know what an employee is. Someone trading time and labor for financial benefit with a company. If you live in the Lake Mary area in central eastern Florida you can enter one of the city’s grocery stores and see employees performing all kinds of tasks. They stock shelves, run the registers, sweep the floors, and welcome the customers. But who fixes the plumbing and electrical? Who creates the flyers and advertisements? Who does work for the company not related to the service they are providing? They may hire another company for this, or they may use an independent contractor.
Employee vs Independent Contractor:
From the outside, both classifications can seem very similar. When you work as one or the other, the differences can become much more apparent. An employee works closer to the company, and is considered a part of the company itself. The company will withhold federal income tax and the employee’s portion of the Social Security and Medicare taxes. They also are required to pay for other things such as Workers’ Compensation and state unemployment taxes. Employees make up the greater part of the work force.
When dealing with an independent contractor, they will typically perform duties farther away from the companies core services. The employer does not have a responsibility to withhold any taxes from their paycheck and simply have to report how much the independent contractor was paid by the company. The independent contractor will have to pay his own taxes for the pay received from the work performed.
Seven Ways to Decide Worker Classification:
Amount of Control: The amount of control and supervision given can help decide how to classify an employee. If the employer has a large amount of control, or spends more time in a state of supervising the worker then it is most likely an employed arrangement. An employee will usually represent a company more than an independent contractor, and cost more in taxes. They have a schedule they must follow for when they work and don’t work. The company can tend to expect more from them because of this.
Independent contractors on the other hand will carry the company name with them, but are in most cases less representative of the company and more representative of themselves. Their work may not be at the company but done at home or in their own office, or at the businesses’ of clients to the company. They are still supervised as all paid employment is, but are more free to set their own schedules.
Paying for Equipment: An employee will use the equipment of the company he works for. The computers, office supplies, cash registers, company vehicles and other common equipment is provided by the company. Unless an employee directly damages an item, he pays no out of pocket expense for new equipment.
An independent contractor is expected to have the tools required to complete an assignment. If their equipment is damaged, they are expected to replace it at their own expense. Some companies may supply certain equipment to a contractor, but for the most part it is on the shoulders of the independent contractor.
Potential for Profit or Loss: An employee is not at risk of unprovoked profit loss. They are paid a fixed amount for every hour or day of work. The only expenses they have to worry about as far as the workplace is concerned is the cost of commuting to work and home. A lost in profit or pay will, for the most part, only occur when the employee causes negative consequences against their self from a violation or lack of production.
Independent contractors on the other hand can suffer profit or loss depending on the work given. Working on commission can cost more than profit if the work week is slow. If no work is available on a certain day than no income can be collected for that day.
Job Security: An employee can typically be removed from employment easier than an independent contractor. An independent contractor has the equipment and knowledge that would have to be replaced. They may also be on a contract for a certain time period to work for the employer. An employee uses the equipment of the company, and typically only the labor performed has to be replaced.
Relation to the Company’s Services: Employees work close to the core services provided by a company. If one of the grocery stores in Lake Mary hires someone to stock shelves and run registers, they are considered an employee performing the basic duties of the store. If this same store has an individual create flyers and marketing to attract customers, this person is not performing retail services, and is considered an independent contractor.
Employer and Worker Relationship: An employee and the employer will have a stronger connection, working together for the same goal and company. Their work can be potentially permanent as long as the company remains in business. An independent contractor may be hired for a certain amount of time or until an assignment is complete.
Work Relationship Created During Hiring: Rather an new worker is classified as an employee or an independent contractor can be determined during the first interview, or the first day of employment. Both the employer and the worker can agree on the terms of the employment. Sometimes it will be stated during the recruiting process rather a position classifies as for an employee or an independent contractor.
It is important to know where an employee will be, and what that employee will be classified as. It can help optimize your profits, the quality of your products, and avoid confusion in the future. Knowing from the beginning will help avoid any issues when it comes to tax returns and filing. Tax season can be confusing enough without complications, so make it as simple and effective as possible.
