When you take on a new worker, your duties and responsibilities will vary depending on whether they’re an employee or self-employed. Equally, if you’ve started working somewhere new, your relationship and your tax status will vary depending on your employment status. So, what’s the difference between an employee and a self-employed contractor, and why does it matter? Read on to find out.
Payroll and tax
If you’ve taken on an employee, you will add them to the payroll from the start. By contrast, an independent contractor is more likely to issue an invoice for the work they’ve done, either at agreed stages during a project or at regular intervals if you have an ongoing relationship.
If they’re on the payroll, you’ll also be paying PAYE tax that way, while a self-employed contractor will be responsible for completing a self-assessment tax return and paying their own tax and National Insurance.
Your working relationship
You might describe a worker as self-employed, but HMRC could see it differently, depending on your working relationship. For example, if an individual must work specific hours at a set location, they’ll likely be classed as an employee. An employee will need to request time off, whereas a contractor can let you know when they’re available to work. They’ll also work independently without any direct supervision.
A self-employed contractor is also more likely to provide you with a quote for the work you need or submit a bid as part of a tendering process. When you take on an employee, you’ll offer an hourly rate or salary, and they choose whether to accept.
Employees have more rights
An employee has more rights than a self-employed person. For example, they’ll have a right to statutory sick pay, holiday pay and parental leave pay. They’ll also have protection against unfair dismissal, which a self-employed person won’t. Of course, a self-employed contractor will have contractual rights, but the relationship is different. For example, you can terminate a contract with a self-employed person without giving a reason, but this won’t apply if you want to dismiss an employee.
Some employee rights only come into force after they’ve completed a minimum length of service with you.
How to check if someone is self-employed
Self-employed people must register with HMRC. This can apply if they’ve started a business or have a self-employed relationship with a company. A worker is more likely to be classed as self-employed if they have several clients rather than just one. You can check their status online or contact HMRC for advice.
Determining employment status can sometimes be complicated as the tax position can differ from the employment law position, so it’s important to get professional advice. In addition, there are different rules if someone is employed by an agency that sends them to work for you.
The tax rules for contractors changed in April 2021 to reflect this and introduce IR35, which created new rules for contractors who work in a role as an employee but aren’t on the payroll.
Understanding whether you have an employee or a self-employed contractor can help you to deal with your tax affairs and comply with your legal duties. We are here to help; simply complete the form: