Is Your Worker An Employee or Independent Contractor?

Nextep Weekly Tip - employee handbook

A frequent and important issue employers commonly deal with is whether to classify a worker as an employee or an independent contractor. 

Put simply, the difference between an employee and an independent contractor lies in who controls the work.


An employee works according to the company’s rules and schedule. The employee’s pay is subject to taxes, and they can be eligible for company benefits such as insurance or paid time off. Pay is reported on a W-2.

Independent Contractor 

An independent contractor is hired for specific work on a job-to-job basis, often (but not always) under contractual agreement. The worker must have a TIN (Taxpayer Identification Number). Taxes are the contractor’s responsibility; none are taken from the pay. Contractors furnish their own tools, work on their own schedules, and decide how the job will get done. Pay is reported on 1099.

Employers can ask themselves some basic questions to aid in the determination between employee and independent contractor:

  • Do you control how the work is done, including hours, location, or rate of pay? 
  • Do you offer benefits to anyone in a similar position? 
  • Do you furnish the worker with a workspace, computer, or other needed tools? 
  • Is this person in your company’s managerial, executive, or key role? 
  • Are others with similar duties at the company classified as employees?

If the answer to these questions is yes, then the worker is likely an employee, not an independent contractor. 

Misclassifying employees

Companies that misclassify employees as independent contractors cause workers to miss out on several federally-mandated protections including: 

  • Minimum hourly wage
  • Overtime compensation 
  • Workers’ compensation 
  • Unemployment benefits
  • FICA tax withholding
  • Benefits

Employers may be held liable for these missed benefits if they are found to have misclassified employees and other company offerings the worker may have missed, such as paid time off and health benefits. 

Further, the misclassification of employees is a hot topic for the Department of Labor (DOL), which partners with the Internal Revenue Service (IRS) in these efforts. The DOL and IRS have a longstanding Memorandum of Understanding, in which they share information between agencies and work together to target and eradicate employee misclassification. 

Nextep often assists worksite employers in auditing specific jobs to determine if they should be classified as contractors or employees. We have usually found that the person is an employee and helped our client achieve compliance. 

If you need help classifying your workers correctly, Nextep has solutions for you. Contact us to see how we can keep you and your business complaint.

Nextep Weekly Tip Signup

Also on Nextep

An Employer’s Guide to Politics in the Workplace The current political climate can be divisive, and tension can easily spill over into the workplace. When employees hold vastly different political views, it can lead to arguments, hurt feelings, and a fractured work environment. So, what’s an employer’s responsibility when it comes to politics in the […]
Read more
Unpacking the Buzzword You’ve likely heard the term “quiet quitting,” conjuring images of disengaged workers coasting through their jobs. But before we jump on the bandwagon of criticism, let’s take a closer look at what this phenomenon actually means. At its core, quiet quitting describes employees fulfilling their job requirements without going the extra mile. […]
Read more
A No-Nonsense Guide for Business Leaders The work landscape is shifting, and your business might be left behind if you’re still operating with a traditional mindset. Deloitte’s 2023 Global Human Capital Trends report offers valuable insights for navigating this changing terrain. Here are the key takeaways you need to know about the future of your […]
Read more
In today’s evolving work environment, employee engagement and productivity have become critical priorities for businesses. McKinsey’s research sheds light on this topic by identifying six distinct employee personas, each exhibiting varying levels of satisfaction, engagement, and performance. But the most striking revelation? Over half the workforce falls into two stark categories: building value or destroying […]
Read more
How to handle insurance during leave of absence Employee leaves of absence from work raise questions, especially about health benefits. Who shoulders the insurance premiums during the leave? Let’s untangle this knot one thread at a time. Paid Leave: Business as Usual Paid leaves are straightforward. Simply maintain regular benefit deductions from their paychecks as […]
Read more
March 1, 2024 is Employee Appreciation Day! Every year, businesses across the globe take a moment to pause and honor the backbone of their success: their employees. Employee Appreciation Day, usually celebrated on the first Friday of March, is a chance to express sincere gratitude and show these hardworking individuals how much they mean.  Appreciating […]
Read more
Remember that new independent contractor rule coming soon? It’s the one that makes it harder for businesses to call a worker a “contractor.” As a reminder, that big change kicks in March 11, 2024. Why should you care? More workers might become employees. This means benefits like minimum wage, health insurance eligibility, paid time off, […]
Read more
What Businesses Need to Know Last week, we discussed collaborating with employees who request religious accommodations during Ramadan. This week, we’ll look at some of the nuts and bolts of religious accommodations at work and the impact of last year’s Supreme Court case, Groff v. DeJoy. The Groff v. DeJoy decision, as we covered when […]
Read more
Ramadan, the holy month of fasting and reflection for Muslims, begins on Sunday, March 10, 2024, and end on Tuesday, April 9. As an employer, understanding your Muslim employees’ needs during this time fosters a supportive and inclusive workplace.  It’s important to consider that rejecting flexible requests without a valid reason could be seen as […]
Read more
Big Change for Gig Work and More The Department of Labor (DOL) has revised its rules for classifying workers as independent contractors, making it more difficult for businesses to do so.  Effective March 11, 2024, this change impacts workers across the US and could have significant implications for businesses of all sizes. New rules make […]
Read more
Essential Updates for Employers in the New Year Heads up, employers: there are several new workplace laws and regulations in 2024.  The new year is just around the corner, bringing a wave of changes for employers nationwide. These regulations aim to create a fair and supportive work environment that attracts and retains top talent. Federal […]
Read more
Ah, the holiday season—a time for joy, festivities, and the age-old puzzle of compensating your employees. Let’s demystify the rules of holiday pay for both our hourly (nonexempt) and salaried (exempt) workers. For the Hourly Heroes Picture your business decked out in holiday cheer, but your nonexempt employees are sipping cocoa at home. Under the […]
Read more

Download Our App

Download the Nextep Mobile App in Apple iOS or Google Play