You need to hire someone to complete a specific task. You’ve found a qualified candidate who fits your company culture. Before making the offer, have you determined if this person will be an independent contractor or an employee of your business?
Worker classification depends on many variables and can be a confusing topic for business owners. In this post, we’ll lay out the financial, labor law, and tax differences between an employee versus contractor and provide guidance to help you make the right decision for your next hire.
The only way to get a formal worker classification ruling is by filling out Form SS-8 and sending to the IRS. You’ll answer 57 probing questions about the working relationship between you and the worker, then wait a few months for the IRS to respond. Don’t want to do this? Didn’t think so. Understanding the key differences between an independent contractor and an employee are all that is needed for a business owner to self-determine the appropriate worker classification of a new hire.
So how do you make this determination? It all boils down to control. If you control the working relationship and give clear direction to the worker they are an employee. If the worker controls the relationship and doesn’t take much direction from you, in most cases they are a contractor.
- Sets their own hours
- Provide their own tools
- Work on a temporary basis
- Don’t take much direction from you
- Don’t set their own hours, you dictate them
- Are provided all tools, equipment, uniforms etc. to perform their job
- Work on a permanent basis
- Are given direction by you
When paying a contractor, you aren’t responsible for withholding employee payroll taxes, paying the employer portion of payroll taxes, paying workers’ compensation premiums or offering benefits. Simply pay the person and issue them Form 1099 at year end. Conversely, when paying an employee you must withhold employee payroll taxes, pay the employer portion of payroll taxes, pay workers’ compensation premiums, potentially offer benefits and issue a W-2 at year end. On average, there is an additional 15-20% cost to pay the same wage to an employee versus a contractor.
After learning this, many business owners see the short-term cost savings worth the risk to misclassify a worker. Don’t do it! Even if the worker verbally agrees to the contractor classification, if the business relationship goes sour, the worker can still file for unemployment benefits and you can still be liable for back taxes - not to mention an employment audit.
As a business owner, have a conversation upfront before you hire any worker. If you’re going to treat a worker as an independent contractor, get a signed agreement detailing the work to be performed, tax classification status, make certain the worker provides an invoice for their services and have them complete form W-9 for your records.
Have questions about your next hire? Drop us a line - we’re here to help!