June 2026 | Independent Contractor vs. Employee: Why the Classification Matters

Distinguishing an employee from an independent contractor isn’t always straightforward. Getting it wrong can create real problems for a business, from unexpected payroll tax liabilities to penalties for misclassification. Below is a breakdown of the factors that typically signal whether a worker should be treated as an employee or an independent contractor.

Key Factors to Consider

 •      Benefits: Employees are generally eligible for benefits such as sick leave, paid time off, and workers’ compensation. Independent contractors are not.

•      Control of Hours: Employees usually work set, ongoing hours determined by the business. Contractors typically control their own schedules and work only the hours needed to complete a specific project.

•      How They’re Paid: Employees receive wages or salary on a regular payroll cycle. Contractors issue invoices, set their own rates, and are paid per project or per agreement.

•      Tools & Equipment: Employees are generally provided with the tools and equipment needed to do their job. Contractors supply their own.

•      Tax Withholding: Employers must withhold income tax and pay the employer share of Social Security, Medicare, and unemployment taxes for employees. No such withholding applies to independent contractors; they handle their own tax obligations.

Why This Matters

Misclassifying a worker isn’t just a paperwork issue. If the IRS determines that someone treated as a contractor should have been an employee, the business may be responsible for back payroll taxes, penalties, and interest. The label used in a contract doesn’t control the outcome; the actual working relationship does.

Final Note

The factors above are but a few of the tests to determine an employee’s status.  If you’re unsure how to classify a worker, it’s worth getting professional guidance.

For more information, please contact one of the experienced tax professionals at Bormel, Grice & Huyett, P.A. at 301-953-3259 to make sure your business is protected and compliant.