Employee vs. Contractor Classification Quiz

Employee vs. Independent Contractor

• W-2 employees incur higher costs for employers due to mandatory benefits and vacation time.
• Employers are responsible for a portion of employee tax obligations for W-2 employees.
• Independent contractors do not pose the same financial burden; they typically do not receive benefits or paid vacation.

Misclassification Issues

• Employee classification is governed by federal laws concerning control, scheduling, and assignments.
• Misclassification can lead to financial gain for employers but is illegal.
• A study from 2000 found that 10% to 30% of employers misclassified workers.
• About 95% of workers who believed they were misclassified were indeed miscategorized.

Government Enforcement

• The U.S. government is actively addressing misclassification issues.
• In 2011, the Department of Labor recovered over $5 million in back wages for 7,800 misclassified employees.

Tax Withholding Differences

• W-2 employees have taxes such as income tax, Social Security, FICA, and FUTA withheld from their paychecks.
• Independent contractors are responsible for their own tax obligations and do not have the same withholdings.
• Tax withholdings for W-2 employees can exceed 20% of their paycheck, varying by state.