The difference between an Independent Contractor and an Employee
"The difference primarily affects tax status. An independent
contractor (IC) is not an employee of anyone but himself, called self employed, but instead invoices and is paid by the client just as the client would pay any contractor. The client reports the payment to the IRS on a form, IRS Form 1099 but does not withhold taxes or pay social security tax. Other laws and regulations concerning employment, such as wage-hour (requiring overtime for certain employees) and workers compensation do not apply.
"A contract employee is an employee of a temporary service agency.
That agency reports the employee's earnings to the IRS on a form W-2, withholds Federal and state income tax, and pays the employer's share of the social security tax. All federal and state employment laws apply. The employee is not an employee of the client, for whom he performs his services. That client actually is a client of the temporary services agency."
"Often the decision of 1099 or W2 status is based on the circumstances of the work. If you are going to work directly for a company to complete a project, and are to be paid a fixed amount for the project, then there is usually no choice but 1099 status. The company will issue a purchase order to you, you will complete the work and invoice the company.
On the other hand, if you are a contract employee working through a temp agency the agency may not handle 1099 pay, or requires that you be incorporated to avoid a W-2."