Contract Glossary
Independent Contractor vs Employee
Definition
The legal distinction between someone who works independently (sets their own hours, uses their own tools, serves multiple clients) and someone who works under your direction and control. Misclassifying an employee as a contractor can trigger back taxes, penalties, and lawsuits. The IRS, Department of Labor, and state agencies each have their own tests.
In Practice
You hire a developer to build your app. They work exclusively for you, use your laptop, attend daily standups, and follow your coding standards. You pay them via 1099 as a 'contractor.' A labor auditor would likely reclassify them as an employee. Result: you owe back payroll taxes, overtime, benefits, and potentially penalties, sometimes reaching 40% of their total compensation. California's ABC test makes this even stricter: unless the worker is free from your control, does work outside your usual business, and has an independent trade, they're an employee by default.
Common in these contract types
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