Independent Contractors vs. Employees: Distinctions and Implications
In the past decade, advances in autonomy and technology led to major changes in how and where people work. And we don’t just mean the spike in working from home during the COVID-19 pandemic.
With the world and workplace changing fast, it’s easy for any employee to have moments of confusion. No matter where you work, mixing up independent contractors vs. employees is understandable. Adding to your confusion, people working side-by-side are often mixed groups of contractors and employees.
Companies sometimes make intentional or unintentional errors when classifying employees. If not corrected, these misclassifications can cost employees both wages and benefits.
1. How Each Worker Pays Taxes
If you’re an employee in the United States, your employer pays portions of your Social Security, Medicare, and income taxes. The remaining portions come out of your check every pay period. That’s not the case if you’re an independent contractor.
There’s no law requiring an employer to pay taxes for independent contractors. But contractors shouldn’t spend their paychecks or direct deposits right away. Offsetting an independent contractor’s tax-free payments is the self-employment tax.
Technically, independent contractors are self-employed individuals. Because of that, these workers owe the IRS money at tax time. Employees often get money back from the IRS at the cost of paying taxes throughout the year.
2. Classifying Employees vs. Contractors on Benefits
A perk for most people in an employee category is having access to benefits. In exchange for partial contributions by an employee, this person gains access to some or all company-offered benefits. However, there’s no legal requirement for companies to offer benefits to contractors.
Employee benefits vary by company. However, commonly offered benefits can include:
- Health Insurance
- Dental Insurance
- Life Insurance
- Vision insurance
- Retirement Accounts
- Company Stock
3. Paying Contractors vs. Employees
Another difference between independent contractors and employees is how employers pay them. Independent contractors typically work on a per-hour or per-project payment method.
Employees may also receive hourly pay, but some receive salaries. A salary is a guaranteed payment for each period instead of wages based on how many hours you worked.
On paper, salary payments sound nice. And they can be. But some companies offer salaries to employees working 50 to 60 (or more) hours per week. In that case, even with a self-employment tax, independent contractors would likely make more money on a per-hour work basis.
4. Working for Other Companies
The last major difference when comparing employees vs. independent contractors involves where they can work.
An independent contractor may work from home or on a hybrid work schedule. Even if they work in an office full-time, contractors can typically work with any company they please. Employees don’t always have the same freedom.
That’s not to say every person in employee categories can’t have side hustles. Likewise, not all independent contractors work only part-time positions.
The Damage Caused When Companies Misclassify Employees
Regardless of whether a company intended to misclassify an employee, it’s breaking the law. Making matters worse, this business is also costing you money as a worker. A 2022 Economic Policy Institute study found that a construction worker misclassified as an independent contractor can miss out on up to $16,729 per year in benefits and income.
Here are examples of what you can miss out on when employers misclassify independent contractors vs. employees:
- Receiving Overtime Pay
- Qualifying for and Receiving Sick Pay
- Being able to Utilize Paid Time Off (PTO)
- Not Having Access to Company-Provided Retirement Programs
- Getting Advanced Notice of Your Firing or Lay-off
- Missing Out on Benefits
- Not Receiving FMLA Protections Employees Have
Legal Experts Protect Your Rights as an Employee
It can make anyone angry to learn they missed out on rightfully owed wages and benefits. Fortunately, you have the right to seek compensation against an at-fault employer. If you believe an employer incorrectly misclassified you, file a claim against this business. Hiring a law firm specializing in wage and hour law is essential in achieving the best outcome for your case..
Hodges & Foty has decades of experience winning over $100 million in settlements and verdicts for our clients. Board-certified attorneys David Hodges and Don Foty are passionate about helping hard-working adults wronged by former or current employers. Contact Hodges & Foty today for a free evaluation of your employee misclassification and wage-related matters.