What’s The Difference Between an Employee and a Contractor?

Understanding the difference between an employee and a contractor is essential for proper payroll, tax withholding, and compliance with labor laws.

An employee is someone who works for your business, and you pay them payroll and you pay payroll taxes on that money –  about 10% employer payroll taxes on each employee. If you were to pay an employee a thousand dollars a month, you’re going to end up paying an extra hundred dollars a month in employer payroll taxes. You are also going to deduct the employee portion of the taxes from their paycheck, and you’re going to have to pay that to the IRS, so you want to make sure your records are really good so you know what to pay the IRS and any state agencies. 

A contractor is someone whom you hire who is not an employee and who generally does something different than what your company produces, especially in California with its new laws.

If you had a window-washing company and you hired a window washer, you would want them to be an employee. If you have a window washing company and you hired someone to do marketing a few hours a week, that could be a contractor. You are not going to direct their schedule, and you are not going to tell them how to do their job. They are going to come in as an outside service or an outside business and figure out what you need for marketing and then deliver it on a schedule that you both agree with, but you are not telling them what to do or when.

When you pay a contractor, you are not paying any taxes on top of what you pay them.  If you are paying a contractor a thousand dollars a month, you pay them a straight thousand dollars a month.  At the end of the year, you would give them a 1099 reporting exactly what you paid them for your tax records and their tax records.

Don’t forget, 1099s are due by Jan 31st! Let us know if you need any help filing them.

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Sincerely,
Maya Weinreb | Founder & CEO
813-336-1574

Frequently Asked Questions

What is the difference between an employee and a contractor?

An employee works under the direction and control of a business and is paid through payroll with taxes withheld. A contractor is an independent worker or business hired to provide services and is generally responsible for their own taxes.

Do businesses pay payroll taxes for contractors?

No. Businesses generally do not pay employer payroll taxes on payments made to contractors. Instead, contractors typically receive payment for their services and may receive a 1099 form reporting those payments.

Do employees require payroll tax withholding?

Yes. Employers must withhold applicable taxes from employee paychecks and pay employer payroll taxes, including Social Security, Medicare, and unemployment taxes.

How do I determine if someone should be an employee or contractor?

The classification depends on factors such as the level of control the business has over the worker, how the work is performed, the relationship between the parties, and whether the worker operates as an independent business.

When do businesses need to issue a 1099 to contractors?

Businesses generally issue Form 1099-NEC to eligible contractors who meet IRS reporting requirements. Accurate payment records and proper bookkeeping are essential for completing 1099 filings correctly.

Why is correctly classifying workers important?

Correct classification helps businesses comply with payroll tax rules, avoid penalties, maintain accurate records, and prevent costly issues with federal and state agencies.