The distinction between employees and independent contractors is primarily a legal question. The status of someone who works for your project makes a difference in how you pay them and in how they pay taxes; it is guided primarily by the duties they perform and the compensation they receive.
Exempt employees are paid a salary. Exempt employees do not qualify for overtime pay. Nonexempt employees are paid hourly and they can be entitled to overtime pay. Employees are taxed on their income (they receive a W-2 form showing their annual income), and federal taxes, state income taxes, and FICA taxes are withheld from their paychecks.
Independent contractors are paid a fee for services provided and no taxes are withheld. Independent contractors typically have their own businesses and must pay their own income taxes and other fees (business licenses and taxes). Independent contractor are not eligible for workers' compensation coverage or other employee benefits.
What's the difference?
The IRS and the California Employment Development Department distinguish between an independent contractor and an employee for the purpose of payroll taxes and withholding taxes. Basically, an independent contractor is a freelance consultant who runs their own business, but completes a specific task or set of tasks for your project, for example, designing your website or writing a grant proposal. An employee is hired by your project to work under the direction of your project. You will typically set the employee's schedule, work assignments and priorities, while an independent contractor will do this on their own.
How do we know if a worker is an employee or a contractor?
In April 2018, the California Supreme Court made it harder for employers to classify their workers as independent contractors. All workers are now presumed to be employees in California. To classify someone as an independent contractor, organizations must show that:
- The worker is free from managerial control and direction
- The worker performs work that is outside the hirer’s core business
- The worker customarily engages in “an independently established trade, occupation or business”
Under this test, if your project works with youth and you want to hire someone to do a few workshops for them, that person would need to be an on-call or temporary employee, rather than an independent contractor. But if you hired a plumber to repair a leak or an electrician to install a line at your office, that person would be an independent contractor.
In general, assume workers are employees
It is sometimes difficult to determine the status of a worker, but if you are unsure, assume the worker is an employee in the eyes of the IRS and the State of California. If you are unsure whether to classify a worker as an independent contractor or employee, you can speak with the human resources team at Community Partners by contacting hr@CommunityPartners.org
Ultimately, Community Partners reserves the right to make the final determination regarding employee versus contractor status for anyone being compensated by a project. You should never make a promise to a potential worker about their status without first consulting with Community Partners' HR team, as misclassification can result in substantial financial and legal penalties for your project.