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Understand the difference between employees and independent contractors
Learn the basics about classifying a new worker as an employee or an independent contractor.
How you classify a worker—as an employee or an independent contractor—affects their taxes, benefits, and your legal responsibilities. The IRS looks at three areas: who controls the work, how the worker is paid, and how long the relationship lasts.
Use IRS guidelines to determine your worker classification.
Who controls the work
Employees: You can set their schedule and hours, decide how and where they work, require specific tools or methods, and give performance reviews.
Contractors: Focus on the result, not how they get there. If you set a contractor’s hours, require specific methods, or give them performance reviews, it can affect their status as a contractor. Agree on what you need and when, then let them decide how to do it.
How they’re paid
Employees: You pay a salary or hourly wage, withhold payroll taxes, and give them a W-2.
Contractors: You pay per project, by the hour, or from an invoice they send. They handle their own taxes, usually use their own equipment, and get a 1099.
If your worker is an employee, you must:
Withhold payroll taxes like income, Social Security taxes, and Medicare taxes.
Match the employee's Social Security and Medicare taxes.
Pay federal and state unemployment taxes on employee earnings.
Issue a Form W-2 after the end of the year.
If your worker is an independent contractor:
You shouldn't withhold any payroll taxes.
You shouldn't pay federal and state unemployment taxes.
You should send a form 1099-NEC or 1099-MISC after each year.
How long the work lasts
Employees: Usually an ongoing part of your business, often with benefits like paid time off, health insurance, and a 401(k).
Contractors: Usually hired for a set project or period, and generally don’t get those benefits.
Here’s a quick way to think about it: if you need to control how the work gets done day to day, that points to an employee. If you’re paying for a result and the worker decides how to deliver it, that points to a contractor.
Set up your workers
The information contained herein is provided for informational purposes only, and should not be construed as legal, tax or accounting advice on any subject matter. You should not act or refrain from acting on the basis of any content included in this article without seeking legal or other professional advice.
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