What’s the Difference Between Independent Contractors and W-2 Employees?

It’s important for employers to know the difference between independent contractors and W-2 employees for legal reasons. Sometimes differentiating between the two is frustrating and confusing, especially for an employer, but it’s a necessary employment step.

Independent contractors and employees can be paid for the same or similar work, but it’s vital to know the legal differences between them.

Below are some ways to determine if someone is an employee or an independent contractor.

 What Makes an Employee?

The definition of an employee isn’t exactly straightforward, so it’s important for you to hire a legal lawyer if you have concerns or feel confused. Employees must fill out Form W-2, which shows gross amounts paid and amounts withheld for taxes.

When it comes to employees, your company should withhold the following from wages:

  •   Income tax
  •   Social Security
  •   Medicare

According to Massachusetts Independent Contractor Law, you must consider an individual performing any services as an employee unless the employer can prove all three of the following:

  •   The individual is free from control and direction.
  •   The service is performed outside the usual course of the business of the employer.
  •   The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

It is not enough to meet one or two of these tests- all three things must be true for you to lawfully pay someone as an independent contractor.

What Does It Mean if You Are an Independent Contractor?

An independent contractor is someone who provides services to a business but isn’t paid as an employee. At the beginning of each year, they’re given an IRS Form 1099 strictly showing amounts paid (This is why contractors are often called 1099 employees).

Under Massachusetts employment law, the following applies to contractors:

  •   Taxes aren’t withheld
  •   Contributions aren’t made to unemployment on their behalf
  •   They don’t have sick time, overtime, etc.
  •   No social security tax contribution, which means the individual has to pay a percentage of their 1099 income each year.

Does It Even Matter?

Aside from the obvious — it being the law — differentiating between W-2 and 1099 income is important. Even though logistics are complicated, they can often be beneficial because, for example, if you’re really an employee but are inaccurately filed as a contractor, you are missing out on some of the benefits of being an employee and may find yourself unable to collect unemployment benefits if you’re laid off or fired.

If you are an employer and have independent contractors working for you who really should be W-2 employees, you are at risk for a lawsuit under the Massachusetts Wage Act, which can get very expensive for the employer.


If you’re struggling to determine whether you or the person you’ve hired is considered an independent contractor or W-2 employee, don’t worry! Contact us today and our team will help you figure it out, stress-free.

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