INDEPENDENT CONTRACTOR OR EMPLOYEE?
So let’s say you want to hire someone to help you out with some odds and ends with your business…Should you pay them as an Independent Contractor or as an Employee?
The IRS gives a general guideline as to determining the status of a worker:
“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”(1)
According to the IRS (2), there are three factors to help determine a workers level of independence:
Work Behavior
Does the worker get to decide how and when he or she gets the job done? Does the employer tell them where and when to do their work? Do they have workplace hours specified? Do they have freedom to work as they wish or is their workflow determined for them?
Financial Considerations
Does the worker set the price for services? Does the worker determine how and when they are paid? Does the employer provide the resources and tools for the job, or does the worker?
Relationship Type
Is the employer-worker relationship supported by outside contracts? Does the employer provide benefits to the worker? How long is the relationship expected to last? Is the worker play a key role in the product or service of the business?
You will want to ask yourself these key questions prior to searching for a new worker. Sometimes the status of a prospective (or current) worker is not entirely clear, so you will want to make your best judgement based on the degree to which each of the three above qualifications apply to that specific situation. If you are still unsure as to whether a worker should be a contractor or an employee, consult your accountant or tax professional.
Remember, if you hire someone as an Independent Contractor, you may not have as much control over how, when, or where the job is executed, but you will not be required to pay them through payroll, pay payroll taxes on their behalf, or offer benefits. You will need to have them fill out a W-9 Form from the IRS during on-boarding, and file (and issue) to them a 1099 Form in January of each year. If you hire an someone as employee, you will have more job execution control, but you will also be responsible for all employer-related responsibilities on their behalf. You will need to have them fill out a W-4 Form from the IRS and a Federal I-9 Form (along with any other employee specific benefit, additional payroll, and compliance forms) during on-boarding, as well as file Quarterly Payroll Forms and Annual W-2s on their behalf. Whichever route you go, consult with your accountant yearly to make sure you are in compliance with IRS regulations.
If you would like help with your accounting, contact us today!
(1) https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined
(2) Summarized from the IRS website. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
Writer: Heather D. Richard