<img src="https://analytics.humanautomation.ai/ha-analytics.php?idsite=74&amp;rec=1" style="border:0;" alt="">

Contractor vs Employee


Independent Contractor vs. Employee


In short: Independent contractors are self-employed and provide specialized or requested services on an as-needed basis, while employees work for employers and often have little control over their work and performance. 

It's important to understand the difference so you can classify your workers appropriately, otherwise you might be subject to additional taxes, penalties or fines, interest, and/or other retroactive damages. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. (irs.gov)

If an employer-employee relationship exists (regardless of what the relationship is called), workers are not independent contractors, and their earnings are generally not subject to Self-Employment Tax. Make sure you're following both federal and state regulations to ensure you've classified a worker correctly.

Consider the following categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? (irs.gov)

If an independent contractor is paid at least $600 during a tax year, they will receive a form 1099 at the end of the year, which reports to the IRS how much money was paid to the contractor. In contrast, employees receive a W-2 regardless of how much they were paid during the tax year.

Also see these related terms:




Better Bookkeeping

Botkeeper provides you with high-grade bookkeeping using human-assisted AI (which we define as Augmented Intelligence) with advanced automation and skilled accountants to manage your books- plus, powerful software to watch your financials. It’s everything a business owner needs to do the bookkeeping—without actually having to DO the bookkeeping.


Human Assisted Automated Accounting

Ready for the future of accounting? Botkeeper provides automated bookkeeping support to businesses by using a powerful combination of skilled accountants alongside machine learning and artificial intelligence (AI). Our clients receive 24/7 accounting and support as well as incredible insight into their financials with beautiful dashboards and unlimited reporting. 

Learn more now

Check out our blog for helpful content!