Vol. 51, No. 2
Legal Distinctions: Temp vs. Contractor
Employers often use the terms "contingent," "temp" and "contractor" interchangeably, but there are distinctions among them that matter not only to companies but also to Uncle Sam.
"Contingent employees" can mean either temporary workers or contracted professionals. The differences between temps and contractors come down to how their work is structured and how they are compensated. Under Internal Revenue Service (IRS) rules, determining the difference between an employee-and, by extension, a temporary employee-and an independent contractor is a question of control and independence.
The IRS classifies employees as "subject to the business' instructions about when, where, and how to work." Independent contractors have more control over their work arrangements than temporary workers. Those are matters of behavioral control. But the IRS also considers financial control, including how the business pays the worker. While a guaranteed hourly or weekly wage generally indicates an employee, a flat or project fee usually points to an independent contractor.
Generally, temps are paid through their agencies, which withhold taxes and often provide benefits and liability protection. The agencies then bill the client company. Independent contractors are paid directly by their client companies, which don't withhold taxes for them.