-------------------------------
“Ask Jeff" is a weekly post made on the RyanAgency.com Blog.
Submit an insurance-related question to “Ask Jeff”.
-------------------------------
Understanding the Distinction: Employee vs Independent Contractor
Jeff Ryan
July 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.
Frequently Asked Questions Understanding the Distinction: Employee vs Independent Contractor
Why is properly classifying workers as employees or independent contractors important for businesses in New York State?
Proper classification is crucial to avoid significant penalties from government agencies like the IRS, the New York State Department of Labor, and the Workers Compensation Board. Misclassification can lead to substantial financial and legal repercussions for a business.
What are the primary categories of factors used to determine if a worker is an employee or an independent contractor?
The determination hinges on behavioral, financial, and relationship components of the working arrangement.
Can you provide some examples of behavioral factors that differentiate an employee from an independent contractor?
An employee typically works for a business, has their work determined by the employer regarding "when and how," and uses the employer's tools and equipment. An independent contractor, conversely, runs their own business, determines "when and how" they perform the work, and furnishes their own tools and supplies.
What are some key financial distinctions between an employee and an independent contractor?
Employees are usually paid based on time worked or piece rate, while independent contractors are paid upon completion of specific projects. Employees receive a W-2 for wage reporting, whereas independent contractors receive a 1099 for contract payments.
How does the nature of the relationship differ between an employee and an independent contractor?
An employee typically has a continuing relationship with one company agreed upon at the start. An independent contractor's relationship is generally temporary, based on a contract to complete specific projects and they often work with many businesses.
What are some of the financial requirements and costs associated with having employees?
Businesses with employees have numerous obligations, including maintaining payroll records, reporting to state and federal authorities, remitting employee tax withholdings, and paying employer taxes and benefits such as the employer portion of FICA tax, unemployment taxes, and workers' compensation (including DBL/PFL in NYS).
What are the potential consequences of misclassifying an employee as an independent contractor?
Misclassification can result in severe consequences, including tax reporting fines, a percentage of missed wages and FICA taxes, repayments for employee benefits insurance, and significant penalties from the Workers Compensation Board.
Where should a business seek advice to ensure proper worker classification in New York State?
To determine whether a worker is an employee or independent contractor, businesses should seek advice from their attorney and accountant. Additionally, the New York State Department of Labor can be consulted for specific inquiries.
Employee vs Independent Contractor Classification Deep Dive Podcast
The content in this article, including the podcast and FAQ, was created by the staff at The Ryan Agency, with portions generated using artificial intelligence. This information is for general informational purposes only and should not be relied upon as professional advice. For guidance specific to your situation, please consult your policy documents and an insurance professional. The Ryan Agency, Jeff Ryan, and our staff expressly disclaim any liability for actions taken or not taken based on this content without consulting your policy or an insurance professional.
About the Author: Jeff Ryan has been a licensed insurance agent since 1978, later becoming a full-time insurance professional in 1983. Since then, he has been the principal of The Ryan Agencies with offices in Hornell, Jasper, and Wellsville. The agencies serve approximately 15,000 clients in New York and Pennsylvania. Jeff holds numerous credentials including the Chartered Property & Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC), Accredited Advisor in Insurance (AAI), Chartered Life Underwriter (CLU), and Chartered Financial Consultant (ChFC) designations. He holds a Master's Degree from the American College. Jeff enjoys writing about all things insurance and welcomes your questions and feedback.
This article may have been originally published at Quora.com.
To see Jeff's Quora.com profile click here.
Insurance fraud is a significant problem, exceeding $300 billion annually, with the Property and Casualty sector contributing nearly $50 billion to that total.
Living in New York, you might have a stack of insurance documents—auto, homeowners, health, or life insurance policies—filed away somewhere. But how long should you keep those documents, and specifically, what papers should you hold on to?
The year 1962 was marked by historic events—from the Cuban Missile Crisis to the passing of Marilyn Monroe. But while the world focused on these headlines, Lee A. Ryan was working alongside his brothers on my grandparents' farm when an unexpected opportunity arose—an invitation to join the insurance business. With no prior experience, no clients, and limited resources, my dad took a leap of faith and partnered with Nationwide Insurance to start an agency from scratch. Operating out of his home on Karr Valley Road in Almond, NY, he built his business one relationship at a time (some of whom are still clients!), laying the foundation for what would become a lasting legacy.
“Am I covered if I drive someone else’s car?” Or, “Am I covered if someone else drives mine?”
Many don’t realize that the insurance industry is one of the country's most regulated business segments, especially in New York State. The New York State Department of Financial Services (NYS DFS) wields significant control over the insurance business and has a stated goal of protecting consumers.
Most property insurance companies offer Actual Cash Value or Replacement Cost settlement options. Typically, insurance companies will require that you insure the property to the settlement value you choose. If you select Actual Cash Value, the amount you may be required to insure the property for will be less than the corresponding Replacement Value.
In that spirit, the Ryan Agency is sponsoring a Stearns BBQ Dinner pickup at our office on 57 Broadway Mall in Hornell on September 12th from 3:00 PM to 4:30 PM.
Today, an individual’s credit history can play a more significant role than any one of those traditional factors. Good Credit Scores lead to a Positive Insurance score. A good Insurance Score greatly influences what someone will pay to insure their vehicles.
Insurance companies offer various discounts for which their policyholders may qualify.
Great Eight number Six (6) suggests taking a look at removing Comprehensive and Collision on Older Vehicles.
