Common Cents # 17 - Employee vs Contractor

 

Employee verses Contractor.

Have you ever wondered about the difference of being an employee versus an independent contractor for a company?  Because of recent Uber news from California, there has been discussion about this issue. With more and more individuals looking for ways to gain extra income, it needs to be understood to get the best result from the time and effort expended.  The Internal Revenue Service sets out a clear description of each, but some details can make it confusing.

If I am an employer with employees, I am required to pay into their Social Security and Medicare account, withhold their part of Social Security, Medicare, and income tax to submit to the government for them, and am likely to provide health insurance and maybe a pension plan. Additionally, there are requirements concerning overtime, minimum wage, dismissals, record keeping and so forth.

If I contract with someone to do a particular job, I do not have to do any of those things. For example, if I hire somebody to mow my lawn, they are not an employee, they are a contractor. I just pay them when the lawn is mowed. They are responsible for reporting their income, paying their own taxes, providing for their own health care and everything else. They can come and go as they please, work as much as they like, furnish their own mower, buy the gas, and pay for repairs as needed.

If on the other hand, I own the mower, buy the gas, and tell them to be here at 9:00 and pay them by the hour, they are an employee. Obviously, there could be some gray areas, with some employers declaring employees to be independent contractors to avoid paying taxes and employment laws such as minimum wage or overtime.

When I was a tax professional this was a big issue. There would be people coming in to file their taxes, saying they were employees of a certain company and then produce a 1099-Misc, not a W-2. The 1099-Misc is the form for non-employee compensation. That means that they had no withholding, so their total tax bill was now due. Additionally, they had not paid any FICA (Social Security and Medicare) which was now due. If I receive a 1099-Misc, the IRS assumes, at least for the company issuing the 1099-Misc, I am self-employed and I must file a Schedule C and do all of the associated record keeping for the income received. For 2020 there is a new Form 1099 especially for contractors.

Every year, I had to explain to many people that their “employer” may have just ripped them off and in fact, may have committed a serious crime by illegally declaring an employee to be an independent contractor without giving them the freedom associated with being an independent contractor.

If I have people working for me, I must know the difference and be willing to follow the law. Contractors do not need to punch a time clock or have direct supervision. They just need to do the work in the agreed amount of time. If I furnish the equipment and supplies and tell them what hours to work or supervise the work, they are employees and everyone is subject to a different set of laws.

This has been in the courts recently because Uber and Lyft say their drivers are independent contractors because they furnish their own cars and do not have to answer every call. The government says they are employees because of rules concerning what kind of cars they can use, a required dress code, and other supervisory issues dictated by Uber and Lyft. The rulings that will be given by the court will be of interest to thousands of people in the “gig” economy doing all they can to provide for themselves and their families.