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.  You need to know this because if you are the independent contractor, you may be missing out on important benefits and legal protections because of your classification.  If you are the employer, you could be at risk for a lawsuit or enforcement action by the Attorney General if you get the classification wrong.

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

When is an Employee Not an Employee, or a Contractor Not a Contractor?

The definition of an employee isn’t exactly straightforward, so it’s important for you to consult an employment lawyer if you have concerns or feel confused. Employees must receive 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 to be 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.  This means that if the service someone are providing is within the usual course of business of their employer (for example, you are providing painting services for a painting company, or writing ad copy for a marketing agency, or delivering food for a take out restaurant), that person should not be classified as an independent contractor even if they meet the other two prongs.

Similarly, if the service they are providing is not something the employer usually does (for example, you are providing painting services for a law office, or web design services for a restaurant), if the work is subject to significant control or direction, or if the contractor is not free to offer those services to others at the same time they are performing them for the business in question, the law might consider them an employee rather than 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 in self-employment tax
• The individual may not be eligible for unemployment benefits if they are terminated

Also, though an employer can take out a workers compensation insurance policy for independent contractors, many times there is no insurance, which can leave the worker without coverage if they are injured while performing services.  It can also leave the business without the protection of the workers compensation laws, and liable for any injuries that are its fault.

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.
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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 someone is misclassified as an independent contractor and wins a lawsuit for damages, the employer will have to pay three times the damages proven (for example, unpaid overtime, missed unemployment benefits, amounts paid by the employee in self-employment tax), and will also be responsible for the employee's legal fees and expenses, on top of your own.

Also, though most often complaints about independent contractor classification are made by a lawsuit filed by the worker, you should know that the Massachusetts Attorney General has enforcement authority under the Independent Contractor Law, and can investigate and impose penalties on the employer even if your contractors do not complain.


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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About slnlaw

We are a Massachusetts law firm focused on business law, employment law, and estate planning. Our team includes attorneys with large law firm experience, public service experience, experience working with small businesses on a wide variety of matters, an attorney with an advanced degree (LLM), and a former clerk to the Massachusetts Supreme Judicial Court.  Attorney and founder Emily Smith-Lee has been named to the Massachusetts Super Lawyers list every year since 2013, and was recently named a 2018 Lawyer of the Year by Massachusetts Lawyers Weekly.  Our lead estate planning attorney Jenna Ordway has been recognized as a top estate planning attorney, and has published a book about estate planning in Massachusetts.
 
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• Employment Law: We advise both businesses and individuals about Massachusetts and federal employment laws, and represent them as needed in litigation if a lawsuit cannot be avoided. 
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"It was a pleasure working with Emily Smith-Lee on a business matter. She willingly shares her expertise and always listens to her clients' concerns. Emily's caring demeanor puts people at ease immediately. The outcome of my experience was quite favorable. I would highly recommend them."  Camille B.

​"Emily is an incredible resource of knowledge on employment law. She helped guide us on how to structure our employee classifications and made adjustments to our consulting agreements so our business is better protected and positioned. She's both law-savvy and business minded - great asset to have when launching/growing a business."  Diana B.

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​"Previously, I spoke with a couple other lawyers and I did not feel comfortable with their approach prior to calling Emily. Jenna did an excellent job in assessing what I wanted to accomplish and completed my will, trust and other documents in a very short time. I am so happy I made the right choice in choosing slnlaw as my estate team."  Evelyn W.

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