What’s the Difference Between a Contractor and an Independent Contractor?

Today, we want to clarify confusion about two workforce industry terms often misused and mistaken for each other: “contractor” and “independent contractor.” While these terms sound similar, and one could easily refer to one while meaning the other, major differences exist between the assets of a contractor and an independent contractor. 

Failing to understand the distinctions between these types of contractors can be costly for any hiring organization. Here’s the difference and why it matters:

Contractor vs. Independent Contractor

Think of it this way: All independent contractors are contractors. However, not all contractors are independent contractors. OK, but what’s a contractor?

Contractors

The term ‘contractor’ is typically a synonym for a temporary worker. Essentially, any temporary worker—including temps from a staff supplementation vendor, payroll workers from an employer of record service, or leased employees through a PEO—is considered a contractor. This is because they are not a full-time employee of the hiring organization, and are typically delivered to the hiring organization as part of a contract between that organization and a staffing vendor.

However, (and this is the crucial part) these contractors are still W2 wage-earning employees of either the hiring org or its vendor. As such, all the tax regulations governing withholding and reporting for W2 earners apply to these contractors regardless of who pays them (the hiring company or EOR/PEO/AOR, etc.).

Independent Contractors

An independent contractor, on the other hand, is not a W2 wage-earning employee but is instead like their own boss or in business for themselves. In other words, a hiring organization engaging an independent contractor hires another business to perform a task or series of tasks. The hiring org pays the independent contractor an agreed-upon contract rate and is not responsible for the tax withholding, insurance, and other administrative burdens associated with regular contract employees. Instead, tax payments, insurance, and other benefits are solely the independent contractor’s responsibility.

The independent contractor worker classification is typically more heavily scrutinized by the IRS and DOL because of the higher potential for fraud associated with using IC status. Whether it is dishonest hiring organizations using ICs to circumvent the costs of workers comp, unemployment, medical, and other benefits or workers leveraging IC status to skirt income taxes, the authorities keep closer control over IC classification.

Several critical characteristics define a legitimate independent contractor, which are provided and enforced by the IRS and Department of Labor—which this blog has covered extensively in earlier posts like this and this. There is also no shortage of examples of serious negative repercussions for improper or fraudulent IC classification, which we covered in posts like this one with a $204 million penalty, and this one plaguing an entire industry.

For More Workforce Solutions

At nextSource, one of the ways we deliver value to our customers—and the broader workforce management industry—is by offering workforce education tools for those who need guidance in this often complicated and forever-changing business.

For guidance on workforce solutions, connect with us today and read more on our blog!