What Differentiates Independent Contractors From Employees
Unlike employees, independent contractors don’t get workers’ compensation benefits. This is why your employer should classify your relationship with them correctly. Otherwise, you might miss benefits if you suffer an injury on the job. Below are some of the factors that separate independent contractors from employees.
Business Separation
You are an independent contractor if your business is separate from your boss’s business. A separate business means that:
- • You have your own office
- • You use your own tools or equipment
- • You use your own materials
For example, Joe the plumber is not an independent contractor if he relies on John’s truck, works from John’s offices, and uses John’s tools (such as wrenches) to execute their business. In such a case, Joe is an employee, and John should provide him with workers’ compensation coverage.
Contract Specificity
Secondly, you are an independent contractor if you have a contract that specifies this with the other party. The contract should:
- • Cover specific services
- • Run for a specific period
- • Be worth a specific amount
For example, if John owns a shopping mall, he can give Joe the plumber a contract to maintain the mall’s plumbing system for the year.
EIN Application and Tax Filing
All businesses must register with the government for tax purposes. Your registration status determines whether you are an independent contractor or not. For example, an independent contractor should:
- • Have federal employer identification number (EIN)
- • File taxes as a business entity
- • File taxes as a self-employed person
Employees don’t need to meet the above requirements.
Overhead Payments
As an independent contractor, you are responsible for all the expenses of your business. For example, if plumber Joe is an independent contractor, then he has to:
- • Buy fuel for his truck
- • Buy plumbing tools and equipment
- • Pay utility bills for his personal office
- • Service and maintain his own equipment
However, if plumber Joe is an employee, then he doesn’t have to pay for the above expenses — his employer does.
Job Responsibility
You are also an independent contractor if you are solely responsible for the successful completion of the services in your contract. For example, if a homeowner wants you to install a toilet, the onus is on you to install a functional toilet as per the homeowner’s wishes. You won’t get any help from the homeowner. You will also be responsible if you fail to install the toilet.
The situation is different for an employee who is not fully responsible for their employer’s work. Say you are an employee, and your employer has obtained a toilet-installation contract. In this case, you won’t be responsible for the failure or success of the installation — your employer is. However, outside of the contract your employer can engage in disciplinary action toward you, like a suspension or termination, if your actions or behavior merit it.
Profit Enjoyment
An independent contractor enjoys the profits of their work and bears the loss of their business. If Joe the plumber is an independent contractor, he pockets all the profits and suffers all the losses of his business. If Joe the plumber is an employee, then all the profits and losses belong to the employer. Joe gets his agreed upon salary or wage even if the employer suffers a loss or enjoys a windfall.
Compensation Type
Lastly, the contract specifies the compensation an independent contractor expects for a contract. An independent contractor’s compensation typically takes three main forms:
- • Commission payments
- • Per-job payments
- • Competitive bid
An employee gets compensation in the form of wages or salaries.
Consult a workers’ compensation lawyer if you suspect that your employer has incorrectly classified you as an independent contractor. Walz Law Office has a wealth of experience with workers’ compensation issues. Contact us for a consultation so that we can help you prove your status as an employee and file your workers’ compensation claim.