Employees versus independent contractors

• ✺Your classification affects your tax obligations, access to benefits, and legal protections like minimum wage and overtime.
• ✺Contractors must proactively save for and pay self-employment taxes, since nothing is automatically withheld.
• ✺Understanding misclassification helps you recognize and address it if your actual working conditions don't match your labeled status.

Independent contractor

A self-employed worker who controls their own work methods and is responsible for their own taxes and benefits.

Self-employment tax

A tax covering both the employee and employer portions of Social Security and Medicare, paid by self-employed individuals.

1099-NEC

A tax form reporting nonemployee compensation paid to an independent contractor.

Misclassification

Incorrectly labeling a worker as a contractor when they are legally functioning as an employee, or vice versa.

• ✗Assuming a contract's label ("contractor" or "employee") automatically determines legal classification.
• ✗Not setting aside money for self-employment taxes as a contractor, leading to a large tax bill.
• ✗Not realizing contractors generally aren't covered by minimum wage, overtime, or unemployment insurance protections.
• ✗Ignoring signs of misclassification, like being closely controlled while labeled a contractor.
• ✗Not tracking business expenses as a contractor, which could reduce taxable income.

• !Different agencies (IRS, DOL, and states) may use somewhat different tests, so classification outcomes can occasionally differ depending on the context.
• !Contractors should generally make estimated quarterly tax payments to avoid penalties, since no taxes are withheld from their pay.
• !Workers who believe they've been misclassified can file a complaint with the Department of Labor or their state labor agency.
• !Being called a contractor doesn't waive your legal rights if your actual working conditions match an employee relationship.

• Employees work under closer employer control and have taxes withheld; contractors operate more independently and handle their own taxes.
• Classification depends on the actual working relationship, not just the label used.
• Contractors must pay self-employment tax and generally lack employee protections like overtime.
• Misclassification can be challenged through labor agencies if your real working conditions suggest employee status.

Totally optional. Nobody's grading you.

1. 1.If you're a contractor, research quarterly estimated tax payments to avoid a surprise tax bill.
2. 2.If you suspect misclassification, review the Department of Labor's guidance or contact your state labor agency.

Related lessons:

• How freelancing works
• Self-employment taxes
• What a 1099 is

• Employee or independent contractor classification
  U.S. Department of Labor(opens in a new tab)
• Independent contractor vs. employee (tax)
  Internal Revenue Service (IRS)(opens in a new tab)