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Employee Vs. Independent Contractor

If you are a business owner and your business is growing you may be looking into hiring additional help.  The question then may be whether you should hire this person as an employee or as an independent contractor.

Like most business owners, you will probably start by weighing those costs associated with each classification.  Hiring an independent contractor can eliminate the cost of payroll taxes, unemployment insurance, workers compensation insurance and benefits that are normally associated with hiring employees.  However, this should not be the main factor in your determination.  Other factors that must be considered include the following:

• Will you have the right to direct or control what needs to be done and how it will be accomplished?  Or do you only have the right to direct or control the results of the work to be done?  According to the IRS website, if you have the right to control or direct not only what is to be done, but also how it is done, then your workers are most likely employees.  If you can direct or control only the results of the work done – and not the means and methods of accomplishing the result – then your workers may be independent contractors.
• Is the position the worker being hired for permanent or temporary?  If a worker is hired for an indefinite time period, rather than for a specific time period or project, then this worker may be considered an employee.
• Will the worker be responsible for providing the equipment or materials needed to perform the job?  If so, this worker may be an independent contractor.
• How will the worker be paid?  Employees are generally paid hourly, weekly, etc. and independent contractors are usually paid a flat fee for the job. However, it is common in some professions, such as with attorneys, to pay independent contractors hourly.
• Does the person being hired work only for you?  Independent contractors are free to market their services to others and can work for as many people as they want.

Classifying workers as independent contractors may be an attractive option when you consider the costs related to each. However, the wrong determination can be costly. The IRS has strict guidelines about employment classification and they are cracking down on those who ignore those guidelines.  They are looking for lost tax revenue dollars and they will have no problems making you responsible for past payroll taxes, including interest and penalties, for workers you misclassified as independent contractors.  If you need more information or you cannot determine how to classify a worker based on your specific situation, please contact your accounting professional for more guidance.  You can also get more information on this topic from the IRS website.

Sharlynn Garza