US Worker Classification: Independent Contractor or Employee?
Worker classification in the US is important, but it doesn’t need to be stressful or complicated for international recruiters.
Why is worker classification important?
Understanding how to correctly classify workers as employees or independent contractors should be a priority for companies hiring in the US because worker misclassification can potentially have legal implications.
An example of worker misclassification is when a company incorrectly determines that a worker is an independent contractor when they should legally be classified as an employee. Classification can be based on a few factors, such as the relationship of the parties and financial control.
Independent Contractors vs Employees
When hiring in the US, there are some key differences between independent contractors and employees to be aware of.
Worker autonomy
Independent contractors
One thing to consider when determining if a worker is an employee or an independent contractor is the level of autonomy the worker has. The more autonomy that a worker has in performing their work, the more likely it is that the worker will be classified as an independent contractor.
Independent contractors are considered self-employed and are not salaried employees. These types of contractors may work with multiple clients simultaneously and set their own schedules. They are often hired to work on a project-to-project basis with hard deadlines.
Independent contractors typically have more control over their working hours, work location and preferred tools. Independent contractors are often responsible for clocking their time or invoicing clients to get paid for their work on projects.
Employees
Employees differ greatly in that they often have less autonomy in their job and are typically supervised by a direct manager or boss. Employees may be on company payroll and get paid periodically (e.g., weekly or monthly), as opposed to hourly or per project like an independent contractor.
Legal Forms
In the US, different legal forms are required for workers depending on their classification of employee or independent contractor.
W-2 for employees
Employees are required to fill out a W-2 form. A W-2, also known as a Wage and Tax Statement is a form utilized in the US to report an employee’s wages and the taxes withheld from those wages to the Internal Revenue Service (IRS) and the employee themselves.
The employer is responsible for issuing a W-2 form to each of its employees. It is essential that employees are provided with a W-2, as it is how US employees file their annual income tax returns. W-2’s are also a way for US employees to have proof of income and taxes paid.
W-4 for employees
A W-4 form, also known as an Employee’s Withholding Allowance Certificate, is a form used by US employees that informs their employers of their tax filing status, such as deductions or credits they are eligible to claim. Employers use this information when calculating how much federal income tax to withhold from the employee’s paychecks.
Employees can edit and make any necessary changes to their W-4 form at any time during the year if their personal circumstances change (e.g., marriage or having a child).
W-9 for independent contractors
A W-9 form, also known as a Request for Taxpayer Identification Number and Certification, is a form used in the US by independent contractors to provide their taxpayer identification number (TIN) and certification to the company that will be paying them.
The W-9 form does not need to be submitted to the IRS, but the business or organization that is paying the independent contractor should keep the contractor’s W-9 as a record of the TIN provided. However, they are required to file an information return to the IRS (Form 1099).
1099 for independent contractors
A 1099 form is a tax form used in the US to report non-employment income received by an individual or business during the year. The 1099 form reports the total amount of money the independent contractor was paid during the year. There are several different types of 1099 forms in the US.
Contractors can use a 1099 form to report their non-employment income on their tax return and to calculate the taxes they owe. Keep in mind independent contractors are considered self-employed and oversee paying their own taxes.
Employee Benefits
According to the Fair Labor Standards Act (FLSA), employees are entitled to several legal protections and benefits from their employer, such as minimum wage and overtime pay, workers’ compensation, and unemployment insurance. US employees may also receive a benefits package from their employer including health, dental, vision, PTO, 401(k) etc. Independent contractors are typically not entitled to all of the same employee protections and benefits.
Disclaimer: This post is provided for informational purposes and should not be considered legal advice, the final word on this topic or a political opinion.