How Do You Know If You’re Classified as a Contractor or an Employee?

A company’s workforce is arguably the most significant factor in an organization’s success. That’s why business owners make a conscious effort to build worthwhile relationships with their team. However, with the mix of employees and freelancers, sometimes they get into trouble with independent contractor compliance as things could easily get jumbled.  

But you may ask, why do companies have to exercise caution in classifying employees and independent contractors? When a worker is considered an employee, there are responsibilities that the company needs to meet.  

For one, the company is obliged to provide specific benefits like medical insurance. Apart from that, the organization has to pay taxes as stipulated in federal and state laws.  

On the other hand, if you have an independent contractor, you’re not required to do all this since working with ICs entails a different setup.  

contractors database for independent contractor compliance

What Could Differentiate ICs from Employees in Terms of Relationship with the Company? 

Behavioral Control 

Typically, independent contractors get to design and schedule their work hours, the number of hours they want to work every day, and the time they need for breaks between work. They also decide how they want the work to be done, using a process that may be different from the company’s  

After all, independent contractors usually position themselves as experts in their respective fields; thus, they have their own way of doing things.  

However, when the company intervenes with these processes, it may create what one may call an employer-employee relationship. This can easily be confused as misclassification on the company’s side, and the Internal Revenue Service (IRS) may run after them.  

Financial Control 

As experts in their fields, it’s understood that independent contractors already have their set of equipment and gears needed to perform the job or the project. That means the company doesn’t have to provide them with the necessary devices to complete the job. This provision is more common when talking about a worker classified as an employee of a company.  

Furthermore, independent contractors generally take into account all expenses they need to spend for the project. They include these expenses in their asking fee, knowing that the company won’t reimburse these expenses.  

With the reimbursement, on the other hand, it’s easy to assume that the company is working with an employee and not an independent contractor.  

How the worker is paid also says about the relationship of the company to the worker. Is the worker paid with a fixed salary per month? In this case, that worker is readily understood as an employee and not an independent contractor.  

Relationship of the Parties 

Upon regularization, employees usually have a written contract that specifies their pension plan, insurance, vacation pay, and other benefits. However, this is not the case with independent contractors. With ICs, companies don’t have to provide all these benefits as these people pay their own Social Security and medical insurance.  

independent contractor compliance form for business owners

Need Help with Independent Contractor Compliance? 

Running a business means going the extra mile to ensure that everything is operating smoothly and on par with the company’s standards. However, business owners should know the boundaries they can’t cross to avoid confusion and misclassification.  

With ClearPath, we make arrangements clear for you and will be there to help you overlook production matters. Contact us today to learn more about how we can be a great component of your business’s success.   

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