When it is time to hire workers for your business, you have a couple of options. You can hire them as employees or as independent contractors.

There are clear differences that determine which category a worker falls in. If a business owner does not classify them correctly, there are strict penalties.

Employee vs contractor

According to the Office of Child Support Enforcement, one of the biggest factors to consider when classifying a worker is how much control an employer wants to have. An independent contractor (IC) is able to choose the hours he or she works, how to complete a job, where to work etc. A contractor must also provide his or her own supplies.

Although an employee does not have a lot of say as to how to conduct the job, an employee does receive benefits through the employer, which an IC does not. Benefits may include health insurance, vacation, sick pay, pension plan or paid time off. An employer also takes taxes out of an employee’s pay but not a contractor’s.

Penalties for misclassification

Although misclassification can occur for either worker type, it is more common for an employer to misclassify an employee as an independent contractor because it is more financially beneficial for the employer. According to the CPA Journal, the federal government imposes strict penalties for misclassification because it decreases the amount of taxes that the employer should pay the IRS.

If the IRS determines that the misclassification was not intentional, the penalty is less than if it is intentional. When it is intentional, the employer must pay 20% of the wages paid as well as 100% of the FICA taxes. Employers may also face prison time and additional fines.