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Knowing the Difference Between Independent Contractor vs Employee

Career Building

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  • Knowing the Difference Between Independent Contractor vs Employee
PUBLISHED BY Sally Pau / May 13, 2021

There are a lot of ways to earn a living these days, and a lot of different labels to match. Whether you consider yourself a gig worker, independent contractor, employee, self-employed, or 1099 contractor, knowing which bucket you fall into can have some important implications.

Knowing the difference between an employee and an independent contractor and where you fit will determine how you will go about filing your taxes, when or where you work, who you should report to, and what expectations come with your role.

Here’s how to determine which category you fall into.

Understanding Independent Contractor vs Employee Designation

According to the Internal Revenue Service, the difference between independent contractor vs self-employed comes down to three key factors which can be considered an independent contractor vs employee checklist.

  • Behavioral control
  • Financial control
  • Relationship

Behavioral Control

This refers to the workers’ right to direct and control the work they perform, which includes everything from when and where they work, to what tools and supplies they use, and to the degree that they need to follow direct instructions.

If an employer requires that they work certain hours, require certain tools to be used, or requires the worker to follow strict instructions, they are more likely to be classified as a traditional employee. On the other hand, independent contractors are typically evaluated based on the end product of their work, rather than how that work is completed.

In other words, independent contractors don’t have performance reviews, and the business has little say in how they get the job done, so long as it meets the requirements of the assignment.

Financial Control

This refers to how the costs, risks, and compensation are structured. Employees, for example, are typically reimbursed for business expenses, while contractors are not. Employees also have a predetermined salary dictated by the employer, while contractors have the ability to negotiate compensation and take on certain financial risks and rewards.

Independent contractors are also able to offer their services to more than one client at a time, while employees are typically prohibited from seeking business opportunities beyond their employer.

Relationship

And finally, “relationship” refers to things like benefits, permanence, and providing vital services to the business. Employees typically receive employee benefits like insurance, pension, and sick pay, while contractors often don’t. Employees also enter a relationship with their employers for an indefinite period of time, while contractors are typically only employed for the duration of a specific project, or over a specific period of time. Furthermore, those that provide services that are vital to the business’s ability to operate are more likely to qualify as permanent employees.

What is a 1099 worker/1099 independent contractor? 

A 1099 worker or a 1099 independent contractor is another way of saying self-employed. The nickname “1099” refers to a specific IRS document used by those who work independently. Form 1099 is used to report any income earned by an independent contractor over the course of the year.

There are actually a variety of 1099 forms, and each is used to report different types of income that fall outside of traditional employment. For example, independent contractors typically receive a 1099-MISC form from each client that paid them $600 or more in the previous year, while the 1099-K form tracks income received through a debit or credit card specifically.

The term 1099 is therefore used to refer to those who earn part of all of their income as an independent contractor. Is an independent contractor self-employed? The answer is yes, and the terms are often used interchangeably.

What about gig workers? 

Are Uber drivers independent contractors? The answer is also yes. Gig economy workers fall under the 1099 independent contractor designation, so those who drive for ridesharing or food delivery services — often referred to as “gig workers” — are also considered independent contractors. That is because they use their own equipment (Uber doesn’t own your car) can work for multiple employers simultaneously (you can drive for Uber and Lyft on the same day), can choose their own working hours, and are compensated for each individual assignment or job they complete.

Independent contractor vs employee pros and cons

Those who decide to become an independent contractor will enjoy certain advantages, such as a flexible work schedule, autonomy, and the ability to work for multiple clients at the same time. There are, however, a number of disadvantages, such as fluctuating income, a lack of employee benefits, and covering equipment costs. Understanding which employment route is best for you depends on understanding the differences between independent contractor vs employee and what your goals are.

Generally speaking, you can make more money as an independent contractor, as companies often pay more for contractors than they do for full-time staff on an hourly basis. That extra income can sometimes make up for the lack of employee benefits, depending on the individual’s situation. Independent contractors also have the ability to work for multiple employers simultaneously. Furthermore, while a 1099 independent contractor does have to fund their own equipment and supplies, they can often write off those expenses against their earnings to reduce their tax burden.

Many will try to argue whether it’s better to be an independent contractor or an employee, but it often comes down to the individual. Some will prefer knowing exactly where, when, and how they will earn a living, while others are happy to sacrifice consistency for more freedom and autonomy. At the end of the day, there is no right answer and it will depend on your unique skills, interests, and lifestyle preferences.

Luckily for independent contractors, there are new financial options to help keep you on the road when life gets unpredictable. With Moves, you can get access to money when you need it.

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