Question

What is the difference between an employee and a contractor?

Employees receive a 1099 statement.
Contractors may choose when and where they work.
Employees are paid based on the project completed.
Contractors are paid a predetermined annual salary.

Answer 1

Short answer: Employees and independent contractors differ mainly in who controls the work and who bears tax/benefit/employment obligations.

Evaluate the four statements you listed:
- "Employees receive a 1099 statement." — False. Employees normally receive a W‑2 (employer withholds income tax, Social Security, Medicare). A 1099 (usually 1099‑NEC) is issued to independent contractors.
- "Contractors may choose when and where they work." — Generally true. Independent contractors usually have more control over schedule and how/where they perform services, but actual rights depend on the contract and facts of the working relationship.
- "Employees are paid based on the project completed." — Usually false. Employees are typically paid wages or salary (hourly, weekly, or salaried); some employees may be paid per piece or commission, but pay-by-project is more common for contractors.
- "Contractors are paid a predetermined annual salary." — False in the usual sense. Contractors are commonly paid per project, per hour, by invoice, or on a retainer. A contractor could negotiate a fixed annual fee, but that is not the standard arrangement.

Key differences (brief):
- Control: Employers typically direct employees about what, how, when, and where to work; contractors control how they do the work.
- Financial/Business aspects: Contractors often provide their own tools, can incur profit/loss, set fees, and market services to others; employees are paid wages and rarely bear business risk.
- Taxes and benefits: Employers withhold payroll taxes and may provide benefits (health insurance, paid leave); contractors receive gross payment and are responsible for self‑employment taxes and benefits.
- Legal protections: Employees get protections like unemployment insurance, workers’ compensation, and certain labor law protections; contractors generally do not.
- Consequences of misclassification: Misclassifying an employee as a contractor can lead to back taxes, penalties, and liability for unpaid benefits.

If you need to classify a specific worker, check the IRS guidance (the behavioral/financial/relationship factors), your state’s tests (some use an "ABC test"), or consider filing IRS Form SS‑8 or consulting a tax/employment attorney or HR professional.