An independent contractor is someone who owns his or her own business that offers services to the public, sometimes in a business-to-business arrangement. An employee is someone who works for a company that can exert control over where, when and how the worker performs his or her duties.
Sometimes, misclassification of employees as independent contractors happens deliberately by employers who want to avoid paying payroll taxes. Sometimes it is accidental. Nevertheless, it is not employers who decide who is an employee and who is an independent contractor. Rather, it is government agencies, such as the Internal Revenue Service, that make the determination according to certain criteria.
Relationship between the parties
If the worker is performing a key aspect of the business, he or she may be an employee rather than an independent contractor. The worker may also be an employee if he or she is receiving the type of benefits usually reserved for employees, such as vacation pay, health insurance or a pension plan. A written contract between the worker and employer may provide clues as to proper classification.
Financial control
An independent contractor retains control over billing clients for services and other aspects of running his or her business. If the employer controls financial aspects such as when and how the worker gets paid, then the worker may be an employee rather than an independent contractor.
Behavioral control
An independent contractor generally has the freedom to work when and where he or she wants to. If the worker has to observe a schedule that the employer sets or work in a particular location, he or she may be an employee.
It is against the law to misclassify employees as independent contractors. Employers can face harsh penalties for misclassifying workers even if it was unintentional.