Independent Contractors Vs. Employee – The Difference?

March 17, 2023

As a business, you work with several individuals. You hire some of them to become an integral part of your organization, like your employees. In contrast, some work for you on a contractual basis, from gig to gig, like contractors.

Now, you may pay them equally for doing the same task, but are they similar? The answer is a big NO. The two of them differ in several aspects. Let’s learn how.


Rise of independent contractors and gig economy

“Gig economy” describes the trend of hiring individuals for short-term or project-by-project. In contrast, “independent contractor” describes those who work for themselves. They offer clients services on a contract basis.

Three reasons fuel the growth of freelancers (independent contractors) and the “gig economy.”

  • Technological developments
  • Changes in the nature of employment
  • Growth of the internet

The above three factors make it easy to connect with clients and customers. Furthermore, it makes remote working possible without any hassles. As a result, independent contractors have more options than ever. Thus, expanding their enterprises.


Independent contractors vs. Employees: How do you define?

The US Internal Revenue System outlines the differences between independent contractors and employees. This makes it easier for businesses to decide. The following is a brief overview of the same –

Employees

Independent Contractors

They receive extensive instructions about how to work. This includes the following:

●      how, when, or where to do the work

●      what tools or equipment to use

●      what assistants to hire to help with the work

●      where to buy supplies and services

Independent contractors receive instructions on “what” work to do. But they do not receive extensive instructions on how to do it.

For instance, time and place may not be relevant to independent contractors.

Employees often receive training about the necessary procedures and methods they should follow. This means that the employer wants them to operate in a specific manner.

Independent contractors may or may not receive training.

Employees get all the necessary tools and materials to complete their tasks.

Independent contractors often buy or lease the tools and materials themselves to finish the tasks

Employees enjoy employee benefits offered by their employers. These include paid leaves, health & wellness benefits, time off, and more.

Independent contractors do not enjoy employee benefits from their clients.

Employees are paid on an hourly basis or a fixed salary.

Independent contractors are paid on an hourly or project basis.

The employer withholds income tax and

a part of Social security and Medicare taxes. Plus, they should give you Form W-2, Wage, and Tax Statements, which show how much tax is withheld from your salary.

An independent contractor receives Form

1099-MISC, Miscellaneous Income,

from their clients (businesses) to report what they have paid them.

The employer pays Social security, Medicare, and unemployment (FUTA) taxes on their wages.

Independent contractors must pay their own income and self-employment tax. 


Classification of independent contractors and employees in Canada

The Canadian government’s Employment Standards Act (the Act) recognizes an employee as someone who –

  • Receives or is entitled to wages for work performed for another (this includes deceased person)
  • An employer allows performing work performed by an employee.

In contrast, a person who works as an independent contractor is seen as being self-employed or running their own firm.

The Act applies to employees, irrespective of being employed for:

  • Part-time
  • Full time
  • Temporarily
  • Permanently

It is important to note that this act does not apply to independent contractors. Moreover, the label “independent contractor,” even if accepted by the worker, does not settle the question of employment status. This is because the Act’s requirements are minimum standards. And any agreement that seeks to waive them is invalid.


Classification of independent contractors and employees in the UK

The UK government defines an employee as “someone who works under an employment contract.”

Furthermore, they consider all employees as workers. However, unlike workers, employees are also entitled to some additional rights. These include the following –

  • Statutory maternal, paternal, and adoption pay and leave
  • Minimum notice period
  • Statutory sick pay
  • Time off for emergencies
  • Statutory shared parental leave and pay

Furthermore, an employee’s employment status is determined based on outlined conditions. The following are some of them –

  • They must regularly work unless they are on leave
  • The individual must work a minimum number of hours and must be paid for it
  • They have a manager or supervisor responsible for their workload
  • The business gives them all the tools, materials, and equipment

According to the UK government, an individual is self-employed

“if they run their business for themselves and take responsibility for its success or failure.”

These self-employed individuals are not subject to PAYE and do not share in the duties and protections enjoyed by employees.

Furthermore, if a worker believes they have transitioned to self-employment, they must notify HM Revenue and Customs (HMRC).

It is also possible to hold two types of employment simultaneously. For instance, an individual might be employed by an organization during the day. And they can also be self-employed in the evenings by running their own business.

The government outlines that such self-employed individuals work under a contract that uses terms like –

  • Self-employed
  • Consultant
  • Independent contractor

Moreover, they are self-employed individuals if they meet most of the following conditions –

  • They submit proposals or quotations in order to get employment.
  • They send in bills for the services rendered.
  • National Insurance and tax payments are entirely their own responsibility.
  • While they are not working, they do not get holiday or sick pay.
  • They operate alone and are not directly supervised.

Wrapping up

Differentiating between an employee and an independent contractor is crucial. It helps businesses determine the right kind of forms to share. Also, it helps them understand the taxation system better. Moreover, if businesses fail to differentiate correctly, they may end up in trouble.

We hope that after reading this blog, you have a fair idea of the difference between independent contractors and employees. But if you still have any doubts, GJM & Co. is always here to help.

Our expert professionals will explain to you the smallest details. Furthermore, we will help you determine the right tax processes and calculate the taxes. Not just that, we can also take care of your other business needs. These include accounting, bookkeeping, tax filings, creating financial statements, and more.

Should you have any queries or need consultation, Schedule a Call today or write to us at info@gjmco.in.