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Understanding the Distinction: Employee vs Independent Contractor
Jeff Ryan
Jul 20, 2023
The Importance of Proper Employee Classification: Protecting Your Business and Mitigating Risk
As a business operating in New York State, it is crucial to know the difference between an Employer/Employee relationship - and - what is commonly referred to as an Independent Contractor relationship.
The proper distinction between the two can avoid significant penalties from the Internal Revenue Service and the New York State Department of Labor and Workers Compensation Board.
Whether an employee or independent contractor connection exists hinges on behavioral, financial, and relationship components. The chart below outlines some of those factors:
| Employee | Independent Contractor |
|---|---|
| Working for a business | Running their own business |
| Works primarily for one business | Works with many businesses |
| Has a continuing relationship with one company agreed upon at the start. | The relationship is temporary and based on a contract to complete a project(s) |
| Paid based on time worked or piece rate | Paid on completion of specific projects |
| Uses the employer's tools, equipment, and supplies | Furnishes their own tools, equipment, and supplies |
| The employer determines when and how the work will be performed | The independent contractor determines when and how they will perform the work |
| Wages reported to the employee on a W-2 | Contract payment reported on a 1099 |
There are numerous requirements and costs associated with an employer/employee relationship, including:
- Maintenance payroll records and reporting them to state and federal authorities
- Remittance of employee’s state and federal tax withholdings
- Payment of employer taxes and benefits, including:
- Employer portion of FICA tax
- Unemployment taxes
- Workers Compensation (and DBL/PFL in NYS)
It is undeniable that it is costly to have employees. However, their misclassification as an independent contractor comes with significant consequences, including but not limited to:
- Tax reporting fines and a percentage of missed wages and FICA taxes
- Employee benefits insurance repayments
- Severe Workers Compensation Board penalties
Proper classification of employees is a hot topic in New York as the Department of Labor has created a Joint Enforcement Taskforce to crack down on the practice.
To determine whether you have an employee or independent contractor relationship, seek advice from your attorney and accountant. The effort to get it right benefits your business in the long run.
Disclaimer: This article offers general information and should not be considered legal or professional advice. For specific inquiries regarding employee and subcontractor classification, consult with an employment attorney or contact the New York State Department of Labor.
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