What Is the Difference Between an Independent Contractor and an Employee?
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An employee is usually someone hired by a company, works hours set by the company and uses company equipment. The company has control over the employee’s work schedule, decides how many hours the employee must work and pays wages or a salary.
An independent contractor performs services for a company, often on an hourly basis, but the company does not define the hours worked, does not supply the tools used to perform the work, and does not have control over the contractor’s work schedule. The work may be performed off-site.
There are several reasons why the distinction is important. In the case of employees, certain New Mexico laws exist to protect them. For example, a New Mexico employer may be required to pay overtime when an employee works more than a certain number of hours in a day or week, and is required to withhold taxes and to pay into social security and the unemployment fund.
Independent contractors have no such protections. They do the work, get paid for it, and at the beginning of every year, get a 1099-Misc so that they can put the earned income on their tax forms.
The classification of employees versus independent contractor matters because sometimes an employer may view someone as an independent contractor when in fact, they are more properly classified as an employee. In this instance, the “independent contractor” may be entitled to overtime wages and other employee benefits.
Federal law defines the differences between an employee and an independent contractor. Basically, if you as an employer have any type of behavioral control or any direct control over the financial and business aspects of the worker’s job or if you are providing employee-type benefits such as insurance, vacation pay, or sick pay, the person is an employee. A contractor is someone who controls their own behavior and their work schedule. They provide all of their equipment or whatever they’re using for their work as the contractor. Misclassifying an employee can lead to significant and costly consequences.