A non-employee is an individual who works for an organization but is not formally employed by that organization.
Non-employees may work on a temporary, freelance, or contract basis, and they typically do not have the same level of job security or benefits as regular employees.
Examples of non-employees
There are several types of non-employees, each characterized by different work arrangements and contractual relationships with the hiring organization. Here are a few examples of non-employees:
Independent contractors
Contractors are self-employed individuals a company hires to perform specific tasks or projects. Independent contractors are usually responsible for their own taxes and may not receive benefits from the hiring company.
Freelancers
Freelancers are similar to independent contractors but often work on a project-by-project basis. They may offer specialized skills or services and work with multiple clients.
Consultants
Companies hire consultants for a specific period to provide advice or services. Consultants are experts in a particular field and may work independently or as part of a consulting firm.
Temporary workers
Temporary or seasonal workers are hired for a limited duration, often to address short-term increases in workload or to cover regular employees' absences.
Part-time workers
Part-time employees work fewer hours than full-time employees and may not receive the same benefits as full-time employees.
Interns
Interns are individuals, often students or recent graduates, who work temporarily for a company to gain experience in a particular field.
Vendors
Vendors are external entities or individuals that provide goods or services to a company but are not traditional employees. Vendors can include suppliers, contractors, consultants, and other third parties who engage in business transactions with the company.
What is non-employee compensation?
Non-employee compensation refers to payment for work or services provided by individuals not considered regular company employees.
Non-employee compensation is often associated with specific projects or tasks and is distinct from the regular salaries or wages paid to traditional, internal employees.
Non-employee compensation excludes employee benefits, such as health insurance, retirement plans, or unemployment benefits.
Examples of non-employment compensation
Non-employment compensation includes various forms of payment, depending on the nature of the work or services provided. Here are common examples of non-employment compensation:
- Independent contractor payments. Compensation for individuals or companies hired for a specific contract or duration.
- Freelance income. Payment for services completed on a project-by-project basis.
- Consulting fees. Earnings for professional advice or expertise provided to a business.
- Royalties. Revenue generated from intellectual property, such as royalties from books, music, or patents.
- Honoraria. Payments made to individuals for voluntary services, often in a professional or academic setting.
- Income for temporary or seasonal work. Compensation provided to workers in temporary or seasonal positions.
Non-employment compensation is typically taxed differently than regular employee wages. Those who receive non-employment income must manage their own taxes, including self-employment taxes.
For example, companies may provide tax forms like 1099-MISC or 1099-NEC to their U.S. employees to report such payments. The payers and recipients of non-employment compensation must be familiar with tax rules in their jurisdictions and fulfill reporting obligations.
Should I file taxes for non-employee compensation?
Yes, you should report non-employee compensation on your tax return. In the U.S., this income is typically documented on Form 1099-NEC and provided by the payer. Accurate reporting is essential to comply with tax regulations and avoid potential issues or penalties.
Learn more: Forms 1099-NEC vs. 1099-MISC: What’s the Difference?
What is the tax rate for non-employee compensation?
The tax rate for non-employee compensation varies based on several factors, including total income, filing status, and applicable tax laws in your jurisdiction. For instance, in the U.S., non-employee compensation is often subject to income and self-employment taxes.
Independent contractors in the U.S. don't undergo employer tax withholding. Instead, contractors pay a self-employment tax rate of 15.3% on their earnings, covering Social Security and Medicare. Independent contractors pay more in self-employment tax because they don't have an employer contributing to payroll taxes.
Classifying your workforce: Employee vs. non-employee
Employers often turn to hiring contractors both domestically and abroad for specialized projects or to test new markets, saving time and money compared to hiring full-time employees. While there are advantages to hiring contractors, it can also lead to risks of misclassification.
Misclassifying employees as contractors creates challenges like employee back pay, back benefits, and other penalties. It also heightens legal consequences, including fines and the risk of class action lawsuits. Beyond financial and legal concerns, it jeopardizes an employer's reputation and fosters negative perceptions among colleagues and potential hires.
Read more in our complete guide to employee and contractor misclassification.
Key questions for worker classification
Even in the face of substantial misclassification risks, achieving compliance with independent contractor regulations is attainable through diligent efforts and legal counsel.
The following questions can start as a framework for employers to understand whether they've misclassified their workers:
Contractual agreements and intent of parties
- What does the contractual agreement specify about the relationship, including terms, duration, and the nature of the work?
- Can the worker work for multiple clients simultaneously, or is there an exclusivity arrangement?
Compliance
- Does the worker meet legal and regulatory criteria for classification as an independent contractor, considering factors like licensing, business registration, and compliance with labor laws?
Training, integration, and equipment
- Does the worker receive training or onboarding, indicating an ongoing relationship, or are they already skilled and self-sufficient?
- Does the worker use their own tools, equipment, or resources, or does the company provide these?
Nature of work and autonomy
- Is the individual's work a vital aspect of the core business, or is it more distinct and project-based?
- Is the worker integrated into the company's day-to-day operations, attending meetings and events, or are they more independent and isolated?
- How much control does the worker have over their tasks, schedule, and overall work process?
- Can the worker choose when, where, and how they complete their tasks?
Finances, benefits, and taxes
- Is the worker financially independent and responsible for their own expenses and liabilities, or does the company provide financial support and benefits?
- Does the worker receive employee benefits like health insurance or retirement plans?
- Does the company withhold taxes, or does the worker handle their own tax obligations?
- Does the worker bear the financial risk or have the potential for profit or loss based on their performance?
Termination
- Can the worker be terminated at will, or is there an expectation of contract renewal or continuation?
Are your non-employees properly classified? Get our free contractor risk assessment checklist to find out if your contractors are compliant and how to minimize risk.
Disclaimer: This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. You should contact your attorney or tax advisor to obtain legal and/or tax advice with respect to your particular situation. Only your individual attorney or tax advisor can provide assurances that this information—and your interpretation of it—is applicable or appropriate to your specific situation. All liability with respect to actions taken or not taken based on this information is hereby expressly disclaimed. All content is provided "as is," and Velocity Global makes no representations or warranties concerning this information.
