Employee v. Contractor

There has been a growing trend over the last couple of decades of companies paying workers as contractors. In response, the IRS has clarified the rules for classifying workers correctly. This IRS’s article is a clear and concise explanation of the difference between employees and contractors as well as how each is treated in terms of paying taxes. 

How do we determine if a worker is an employee or contractor?

In determining whether a worker should be classified as an employee or a contractor, you should examine how much and what type of control you have over the worker (set hours, set process, etc). We refer you to the IRS article above as it is comprehensive and clear. Essentially, contractors tend to be short-term, project-based and/or paid for an outcome. Companies have little direct control over the how and when work is done by a contractor. Employees, on the other hand, tend to be longer-term, have lots of oversight and companies can stipulate how and when an employee’s work is done. 

Additional clarification was published earlier this year

The Labor Department reaffirmed and clarified the factors for classifying a worker as a contractor in a final rule published in January 2021. The final rule includes the following:

• The economic reality test which determines whether a worker is truly in business for themself (i.e. do they have other clients and perform these same services for others) or if they are dependent on the company for work. Core factors that are most relevant:

• The degree of control over the work

• The worker’s opportunity for profit or loss based on initiative and/or investment

How does the classification impact the company? 

A company must pay Social Security, Medicare and Unemployment taxes on wages paid to an employee. Contractors are considered self-employed, therefore companies do not pay taxes on wages paid to a contractor, rather the contractor pays self-employment tax. 

If you have questions about whether your contractors should actually be classified as employees, ask your Auxilio Partner Strategist. If you are about to hire a contractor, your Partner Strategist can do an assessment and help you develop a contract agreement.