Question 1

What's the main difference between a contractor and an employee?

Accepted Answer

Control. An employee works under your direction — you set their hours, provide tools, and control how they do the work. A contractor controls their own process — you define the end result, not the method. Secondary factors include: whether they work for multiple clients, whether they invoice for services, and whether they provide their own equipment.

Question 2

What happens if I misclassify an employee as a contractor?

Accepted Answer

The consequences are severe. You may owe back payroll taxes (FICA, FUTA, state unemployment), penalties of up to 100% of the unpaid taxes, unpaid overtime and benefits, and workers' compensation claims. In California, willful misclassification carries penalties of $5,000–$25,000 per violation. The IRS, DOL, and state agencies can all audit and penalize independently.

Question 3

What is the ABC test?

Accepted Answer

A strict worker classification test used in California (AB5), Massachusetts, New Jersey, and other states. A worker is an employee unless ALL three conditions are met: (A) they're free from your control, (B) they perform work outside your usual business, and (C) they have an independently established trade or business. Failing any single prong makes them an employee.

Question 4

Can a contract make someone a contractor?

Accepted Answer

No. Calling someone a 'contractor' in a contract doesn't make it so. Courts and agencies look at the actual working relationship, not the label. If the day-to-day reality looks like employment — regular hours, exclusive work, your tools, your office — a contract calling them a contractor won't protect you from reclassification.

Question 5

How do I structure a legitimate contractor relationship?

Accepted Answer

Let the contractor set their own schedule and methods. Don't require exclusivity. Let them use their own tools and workspace. Pay by project or deliverable, not hourly (though hourly billing is common for consultants). Allow them to work for other clients. Use a well-drafted independent contractor agreement that reflects the actual working arrangement.

Question 6

Do contractors get benefits or protections?

Accepted Answer

Generally no. Independent contractors don't receive health insurance, paid time off, workers' compensation, unemployment insurance, or retirement benefits. They're responsible for their own taxes (self-employment tax) and insurance. This cost savings is exactly why misclassification is tempting — and why enforcement is aggressive.

Independent Contractor vs Employee

Definition

In Practice

Common in these contract types

Related terms

Related articles

Frequently asked questions about independent contractor vs employee

Create a contract with proper independent contractor vs employee clauses