Employee or Contractor: Which One Are You Really?

As an independent contractor, your livelihood is dictated by your ability to get gigs. When you’re just starting out, you might be happy to get work, no matter what the “title” is.  After all, you have work and are getting paid, so it’s all good.

However, at times, your client may mistakenly classify you as a contractor instead of an employee. This can lead to big consequences for them from the government.

As the professional being hired, it’s good to have clarity on your title, working relationship and role in your client’s company. We’ll explore the key differences between employees and contractors and provide some tips on what to do if you think you’re being improperly classified.

Employee or Contractor? The Difference Is All About Control

Whether you’re an independent contractor or an employee, it’s determined by how much control your employer has over your schedule and work.

If your client defines exactly how a job must be done (when, where and how to do the job), then the worker should probably be classified as an employee.

Many people incorrectly think that if they’re hiring someone for a short period of time or on a part-time basis, then they’re hiring a contractor. But the contractor/employee classification isn’t determined by the length of the working relationship. So, just because you’re hired for a three-month gig, it doesn’t necessarily mean you’re a contractor. You need to look at all the other factors too.

In the U.S., you can read all about the distinctions between contractors and employees from the Small Business Association and the Equal Employment Opportunity Commission (EEOC). Here’s a high-level summary:

A contractor typically:

• Operates under a business name
• May have his/her own sub-contractors or employees
• Invoices for projects and defines how to invoice/be paid
• Has multiple clients
• Advertises for his or her services
• Sets his or her own schedule
• Chooses his or her clients and projects
• Has his/her own tools to perform the work

An employee typically:

• Does the work as defined by the employer (schedule, workplace, and working process are all defined by the employer)
• Is trained by the employer on how to do the job
• Works for only one employer

So Are You a Contractor or an Employee?

 If you’re wondering if you should be considered an independent contractor or an employee, ask yourself the following questions:

• Who is setting the hours? A client can tell you the final deadline for a project or milestone. But, if the client is telling you that you need to come into the office tomorrow from 9 to 5, then maybe you should be considered an employee.
• Who is defining how the work gets done? A client typically gives a freelancer or contractor high-level instructions on the project or job. Then, the freelancer will use his/her best judgment to pick the tools, process, and schedule to get that project done. There should be little micro-managing.
• How reasonable are the deadlines? Are you able to work with other clients? We’ve all had tight deadlines or been hired at the last minute to pitch in for an urgent need. These aren’t necessarily red flags. But, if you’re engaged in a long-term contract and continually have such tight deadlines and large amounts of work that you can’t possibly work for another client (or advertise your services to find another client), then this could indicate that you should be classified as an employee. Remember that an independent contractor should be able to work with multiple clients at the same time.

 Keep in mind that classification is a rather grey area. There’s no single factor that will identify a worker as an employee or independent contractor. Rather, status should be determined by adding up a number of factors in the client-worker relationship.

Does Any of This Really Matter?

 As I mentioned above, you might be grateful just to have a gig to work on – and maybe you like your current working situation, so does it really matter what you’re called? Perhaps not.

But beware that the IRS and other government agencies look out for cases where companies improperly classify their workers. If your employer is classifying workers as contractors when they should be employees (and then not paying Social Security, Medicare or unemployment), there could be some legal and financial consequences for the employer.

If you’ve been working for a client and are inappropriately classified as a contractor, you may be missing out on major benefits.

For example, you’ve had to pay self-employment taxes yourself instead of having the employer chip in on Social Security/Medicare. Or maybe you should be entitled to perks like sick days, vacation days, maybe even health insurance.

As the gig economy heats up, the IRS is increasingly on the lookout for classification errors and some companies, particularly larger ones, are looking to avoid entanglements with the IRS.

For this reason, some businesses may prefer to work with contractors who are structured as an LLCs or corporations. This will help them show the IRS that you are being properly classified as a contractor.

Take Action: What to Do if You’ve Been Misclassified

If you think your employment position has been improperly classified, the best thing to do is speak directly to your client and ask them to review your classification. Sometimes these errors are just the result of confusion or ignorance rather than a conscious effort to skirt labor laws.

Maybe once the client is alerted to the situation, they’ll either reclassify you as an employee or they’ll adjust the relationship to make sure that you’re treated as an independent contractor.

If you feel that you need to take the situation a step farther, you can contact the IRS and have them review your employment status (check out IRS form SS-8).

When you understand the differences between employees and contractors, you’ll be better equipped to identify potential issues and make sure you’re being treated fairly for the work you do.