What exactly is the difference
between an employee and a freelancer (also called an independent contractor)?
"The principal distinction is control over the means to the end--how you get to the completed project," says Jeffrey L. Braff, a partner in the labor and employment law department of Philadelphia law firm Cozen and O'Connor. "[But] you need to look at the totality of the circumstances." In other words, a variety of factors come into play.
Here are some things Braff suggests watching for:
- Don't provide employee benefits or withhold taxes for independent contractors.
- Pay independent contractors on a per-project basis, rather than hourly, and have your contractor bill you with an invoice.
- It's helpful if independent contractors have an entrepreneurial stake in their business-for example, they (rather than you) pay for their expenses. Keep copies of paperwork with their company logo to show the contractor is an independent business.
- Have a contract documenting their independent contractor status; be careful about termination and exclusivity provisions that may be more suitable to an employee contract.
- Watch your language: Say "retained" and discontinued" instead of "hired" and "fired." You are the "principal" instead of "employer." Contractors are paid "fees," not "salaries" or "wages."
- If you run a newspaper ad for a contractor, place it in the "Business Opportunities" section and keep a copy for your records.
For more information, visit www.irs.gov/forms_pubs/pubs and download Publication 15-A, Employer's Supplemental Tax Guide.