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Employees and independent contractors all play important parts for small businesses across the country. While they can both work for the same company, there are key differences between the two.

Why does proper employment status matter? There are important legal differences between employees and independent contractors that affect payment, protections, and other key HR matters. In addition, improper employee classification can lead to serious penalties from the IRS. Here’s a breakdown on what differentiates independent contractors and employees and how it can impact a small business.

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There are several employee work classifications covering everyone from full-time workers to special classes such as interns. Each person needs to be sorted into their appropriate groups to help determine their benefit eligibility.

However, there are occasions where employees can be incorrectly classified. The government takes this issue very seriously. The Society for Human Resource Management writes that proper employee classification “make[s] sure that all legal requirements are maintained so that there is no discrimination in terms of benefit plan eligibility and payment of compensation in accordance with federal and state laws.” It’s important to know how misclassification works and just how much it can hurt your business.

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