Q.  What are the advantages and disadvantages of being an independent contractor versus an employee?

 

A.  The best way to answer this question is to analyze the differences between an employee and an independent contractor.

 

1.      Employers have the general right to dismiss employees for cause, whereas independent contractors are controlled by contractual agreement whether it be written or implied.

2.      Payment to employees is generally made periodically or by the hour.  Payment to independent contractors is made by the quote or by the job.

3.      An employee is assumed to have a more permanent relationship than an independent contractor who is assumed to have a limited relationship.

4.      Employees usually have all tools and equipment paid for and all overhead paid.  Employees may not hire other employees to assist them unless previously agreed.  Independent contractors supply their own equipment and tools unless otherwise agreed upon and are given opportunity for profit or loss.  They have the right to employ others to assist them.  Court cases have determined independent contractors supply their own employees while employers control the way work is performed, provide all tools, and pay all overhead expenses.

5.      Employers may restrict outside employment of employees, but no such restrictions can be placed on independent contractors because their services are offered to the general public.

 

Substantial liabilities for FICA taxes and withholding can build up unless employers have a reasonable basis for treating an individual as an independent contractor.

Business owners should investigate turning over certain operations to independent contractors who may be able to perform services at an overall lower net cost.

 

Independent contractors always have the following characteristics:

 

1.      No salary;

2.      No payroll taxes;

3.      Less supervision;

4.      Easier termination (by agreement).