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Differences between Employees and Contractors in a Business Setting

Part of the Business Contracts Kit For Dummies Cheat Sheet

Your business may offer contracts to independent contractors — people who do work for your company but who don’t work for your company in the sense of being an employee. Independent contractors differ from employees in some key areas, listed in the following table. Many of these issues directly affect what forms you must fill out with respect to the worker.

Employer Responsibility Employee Independent Contractor
Contribute to Social Security Yes No
Contribute to Medicare taxes Yes No
Withhold applicable federal taxes Yes No
File Form 1099-MISC with IRS if you pay the person $600 or more No Yes
Carry Worker’s Compensation Insurance for the person Yes No
Contribute to unemployment insurance fund and/or tax Yes No
Grant employee job benefits such as paid vacation, sick leave, holidays, and stock options Yes No
Pay employee for overtime Yes Generally no
Right to control how the worker performs the specific task for which he or she is hired Generally yes Generally no
Right to direct or control how the business aspects of the worker’s activities are conducted Generally yes Generally no
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