As mentioned before, business owners who use the services of Independent Contractors now have to use a Form 1099-NEC is. However, this brings up a question that should be addressed going forward: What is the difference between Employees and Independent Contractors?
The IRS itself has pretty clear guidelines on the distinction between the two, given that misrepresenting an employee as an independent contractor has hefty consequences. So visiting their website section can help you grasp the distinction. But to summarize it in an easier to read format, the main distinction is the amount of control that the employer has that determines the payee’s status.
An employee is effectively beholden to an employer and under their control to a large degree. Not only does the employer gives them instructions on where to go, what to do, and when to do their job, but they also often provide the equipment used to do it and provide them a regular wage or salary, along with benefits. On top of that, employees are effectively essential for the business’ operation and considered working for an employer indefinitely unless something changes the relationship.
An independent contractor is not beholden to an employer barring the contract made to do business or the service they provide. They often set their own hours, set their own price for carrying out the service, and complete it within the specified agreements through their own methods. There’s rarely any permanency with an independent contractor, as they are often only brought in for a specified duration, or the life of a project.
Essentially, the more control you have over the payee, the easier it is to classify them as an employee. The less control you have over them, the easier it is to classify them as an independent contractor. Simple, right?
Well, not really. You see, some industries themselves blur these lines to the point where even if someone is considered an independent contractor by the company itself, the state or government will consider them an employee and expect the business to treat them as such. Popular rideshare services like Lyft or Uber are one such example with it being something of a hot topic in California at the time of this writing.
There are benefits to using an employee over an independent contractor, and the reverse is true as well. It will ultimately depend on your business and the circumstances. But regardless, there are heavy penalties for misclassifying one for the other and you should make sure you are certain which category anyone who works for you falls under.
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