When is a worker not an employee but a contractor?


Fair Exchange

Q: I accepted a new job, but on my first day I discovered that I am not a regular employee, my boss says I am a contract employee. What does this mean?

A: Your boss owes you a full explanation of what his plans are for your job. This economy makes it easy for employers to set the terms of employment in their favor, and you should be told what those terms are. If you find out that you may not have more than a few months employment, you will want to begin looking for another job.

There are a couple of reasons your boss may want to call you a contract employee. He may want to give you a test run and see how you do before making you a regular employee. Or he may want to save some money by not providing you with the benefits that the regular employees receive. Either way, you need to know.

Ideally your boss would give you a written employment offer that makes the terms of your employment clear. You should immediately ask for some basic information. How long is the contract for? Who decides what hours you work? What are you responsible for? Will you be paid through the payroll system and will taxes be deducted from your paycheck, or do you have to set aside that money yourself? If your boss doesn’t give you anything in writing, but does answer the core questions it would be smart to write down your understanding of the situation and email a copy to your boss and ask him to confirm or correct the details.

“Contract employee” is a term that means different things to different people. But what really matters is what it means to the IRS and the Department of Labor. Their rules and guidelines are intended to protect people from vague employment situations and make the responsibility for tax payments clear.

Your boss may be confusing contract employee with temporary employee. Here’s a quick summary of the different types of employment relationships. More details are available on the IRS website.

Contractors are considered to be self-employed. They provide a defined service or work on short-term assignments as vendors to a business. Contractors can set their own hours and decide how they do their work. A contractor is responsible to pay his own taxes after receiving a payment from the business. Instead of receiving a W-2 summary of earnings at the end of the tax year, a contractor should receive a Form 1099 summarizing the total payments made to the contractor.

Temporary employees are often hired through a staffing agency to fill in when the business is short-staffed or for seasonal or project specific work. If you are hired through an agency that agency will issue you a paycheck and will deduct all appropriate taxes. Temporary employees do not usually receive any paid time-off or health and welfare benefits.

If a business hires you directly (no agency involvement) to work a temporary position you can be expected to work a specific schedule, be given work assignments and be told how the work is to be done. You will be paid through the company’s payroll and will have all appropriate taxes deducted and paid. If you are hired as a temporary worker on a trial basis you should be given a time frame for the position and allowed to take time off to interview for other jobs.

Regular employees are on the payroll, have taxes withheld, and usually receive some health and paid time-off benefits. They are assigned work tasks and are directed on how the work should be done. Unless the work is seasonal, they expect employment to continue as long as they meet performance requirements and the business continues in operation.

Their employer pays Social Security, state and federal taxes and contributes to worker’s compensation and disability funds.

Cash under the table employment is fairly common with small businesses. While it may seem like a good idea to be paid in cash, you will have no proof of employment or income. If you have an injury or dispute with an employer paying you in cash, you don’t have any of the protections available to regular employees or individuals employed with a formal agreement. And to top it off, the IRS does not look kindly on people who don’t pay their taxes.

If an employer has not been paying employment-related taxes on an employee the IRS has initiated the Voluntary Classification Settlement Program, which allows an employer to make things right in the future and receive some partial relief of past taxes if the employer’s application to this program is accepted.

Virginia Detweiler is a human resources consultant and has taught business and management at Walla Walla Community College and Walla Walla University. Questions for her columns are welcome and can be submitted to her email address at awwcomplady@gmail.com. Those used will be edited to remove information that would identify the sender. She also can be reached at 509-529-1910.


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