Independent Contractors
Explore key distinctions between independent contractors and employees to streamline workflows and reporting.
Independent Contractors
Goals and takeaways
- Explore key differences between independent contractors and employees in system workflows
- Consider suggestions for organizing onboarding, payments, and reporting for contractors
- Reduce confusion by thoughtfully separating worker types in product design
What is an independent contractor?
The IRS defines an independent contractor as a worker for whom the payer controls only the result of the work, not how it is performed. IRS definition
Because contractor definitions can vary across jurisdictions, it's helpful for payroll systems to visibly distinguish contractors from employees. This can make recordkeeping and reporting more transparent and easier for employers to manage.
Key distinctions: Employees vs. contractors
Category | Employee | Independent Contractor |
Legal protections | Covered by labor laws | Not covered by employment law |
Hiring documentation | Requires onboarding, Form W-4, Form I-9 | Often begins with a contract and Form W-9 |
Tax reporting | Reported on Form W-2 | Reported on Form 1099-NEC (if $600+) |
UI/SUI reporting | Included in unemployment insurance reporting | Typically not reported for UI/SUI |
Compensation format | Hourly or salaried, ongoing | May be project-based, milestone, or flat-fee |
These distinctions can help guide system decisions when structuring onboarding, payments, and reporting.
Platform setup and workflow suggestions
Here are a few ideas to help build clearer separation between employees and contractors in product workflows:
Terminology and interface
- Consider avoiding "employee"-specific terms such as "paystub" or "employment"
- Use language like "contractor payment" or "remittance summary"
Identification and separation
- Use different ID formats or numbering conventions for contractors
- Separate views or filters for employee vs. contractor records in navigation and exports
Onboarding and documentation
- Provide a dedicated contractor onboarding flow that requests:
- Name, address, and TIN (via Form W-9)
- Optional: project details or contract name
- Consider limiting employee-specific fields in contractor onboarding
Payment setup
- Support flexible payment types such as per-project, milestone, or flat-rate payments
- Let users define hourly rates if applicable, but avoid defaulting to hourly as the standard
Benefits eligibility
- Avoid surfacing employee-only benefit features to contractor profiles (e.g., PTO accrual, benefits enrollment)
Payroll grouping
- If contractors and employees are paid in the same payroll run:
- Group contractors separately in review screens or exports
- Flag them distinctly in reports or file outputs
Summary
Organizing contractor and employee workflows separately can help reduce confusion and make recordkeeping easier for employers. While classification decisions are outside the scope of system design, thoughtful separation in terminology, setup, and process can help support clarity.
This document offers product design suggestions only and does not determine or imply legal worker classification. Employers and partners should rely on relevant IRS, state, or legal guidance for classification decisions.
Last updated on June 7, 2025