The Ins and Outs of Contractors vs. Employees
By: Glenn Laumeister
Tags: Freelancers, Payments, Gig Economy, Compliance, Fintech

Jobs are changing, and in the new world of 2021, the needs of businesses are quickly evolving. As part of that evolution, workers that are used to an 8:00 a.m. to 5:00 p.m. schedule are going the freelance route.

With more than 59 million Americans performing freelance work last year, we at AllWork are getting one question more often than any other: What’s the difference between an independent contractor and an employee? Employees receive a W-2 as their tax paperwork, and independent contractors receive a 1099. But those forms carry more weight than you might think.

There are many factors the Federal Government takes into consideration when assessing the difference. According to the Internal Revenue Service, there are three ways to determine how a worker will be classified:

Behavioral Control: The designation is indicated by the behavior of the company toward the worker. The worker is an employee if the business has the right to dictate how they perform their job and gives specific instructions. This can include the types of instruction, the detail of instruction, evaluation methods, and training. An independent contractor often uses their own tools and utilizes their own knowledge and experience to perform the work with little instruction by the business.

Financial Control: The designation is indicated by how the worker receives their compensation. The worker is an employee if the business owns the equipment they use to work, if their work expenses are not reimbursed, and if they are paid a set wage with taxes, Social Security, and Medicare deducted. Independent contractors often require reimbursement for expenses, can take a financial loss on the project, and are usually paid a flat fee.

Relationship: The designation is dictated by how the company and worker perceive their relationship with one another. A worker is an employee if there is an expectation that the job will continue indefinitely and if the business pays benefits like overtime, insurance, or healthcare. Independent contractors usually have limited-term employment or provide their services based on contracts rather than employment agreements.

Still confused? It can get a little murky. As you probably know, the IRS is most concerned with how you pay the worker and how they receive the taxes on the work. Mis-classifying a worker can mean fines, interest, and back taxes owed and can really hit a business hard.

AllWork Can Help

As a business owner, we know that compliance and peace of mind are important to you. AllWork is an all-in-one platform that can help you manage freelancers and employees. In managing them, we can help you distinguish the difference, make sure you submit the correct tax paperwork, assist you in knowing what tax and payroll obligations you need to fill, track your deadlines, and more.

Our team of experts at AllWork can work with you directly to help you determine the classification of your workers. You can also manage your business, save money, and assure compliance and accuracy using the following tools:

All-in-one payroll: Keep track of worker hours and payments, as well as compliant tax paperwork, using this tool that integrates with your budget and timesheets.

Keep track of worker hours and payments, as well as compliant tax paperwork, using this tool that integrates with your budget and timesheets. Budgeting and planning: With this tool, you can set your budget and we will keep track of freelancer and employee hours, adjusting to your needs and notifying you if you are spending more than allotted on your workers.

With this tool, you can set your budget and we will keep track of freelancer and employee hours, adjusting to your needs and notifying you if you are spending more than allotted on your workers. App for submitting hours: Whether they’re an employee or an independent contractor, your workers can submit their hours from a simple app, which integrates with the Allwork system.

Whether they’re an employee or an independent contractor, your workers can submit their hours from a simple app, which integrates with the Allwork system. Time optimization tools: Save on administrative costs with our streamlined platform so you can have more time and funds available for your workers, and prevent lags in productivity that often occur with out-of-date systems.

We know that things are changing rapidly. That’s why our platform can help keep you on the right track as your business develops by providing seamless solutions to many of your work needs. In particular, we know that the distinction between independent contractors and employees can be difficult to decipher. Luckily, with AllWork, we’ll figure that out for you so you’ll never have to worry.