Did I hire an Independent Contractor or an Employee?
You took the leap in your creative business and found success! Now you need some help so you can keep doing what you love and not get bogged down with things you don’t love.
It’s time to grow, but classifying your new team member is not as simple as it used to be. There are contractors that work exclusively with one company, there are employees who have totally flexible hours and are remote.
What’s the difference?
Independent Contractors
Can work for multiple companies
Train on their own
Use their own tools & materials
Control how they complete a task
Can be paid on a flat-fee basis (not always)
Employees
Works at a specific time, or within certain hours
Typically work for one company
Has been trained by their current company for their policies and procedures
Has all equipment, supplies, and/or materials provided
Is subject to a large degree of control by the employer (schedule, methods, processes)
Paid a salary or wage
Why would it matter?
There is a large difference in responsibility for either party depending on the classification. In addition, a huge difference in taxation.
However, most importantly, this classification isn’t decided by the company - its the law. There are severe downfalls for classifying incorrectly. Like back paying overtime, employer taxes, and employment lawsuits.
Independent Contractors
Typically do not have benefits
Are not as protected against discrimination or employment laws
Pay their own self employment tax
Are able to write off all expenses associated with being self employed
May qualify for the qualified business income deduction
As someone who hires an independent contractor, only a form 1099 is required to be filed
Employees
Generally receives employee benefits
Are protected for employment discrimination
Are only responsible for the employee portion (50%) of SS and Medicare taxes
Must be paid minimum wage
As an employer, payroll reporting and filings must be completed
As the employee, all non-reimbursed expenses are nondeductible (no write-offs)
Okay, so how do I know how to classify them?
I wish there was a super clear answer but the IRS doesn’t tend to do that. Here are the attributes directly from irs.gov below. These 3 principles are what define whether someone is an employee or a subcontractor.
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Of course not everything is going to land in one category or the other. It will most likely be a mix of the above. But its most important to evaluate the relationship in its entirety.
If its close…
If the line is blurred and classifying is especially difficult, you can:
Get a determination from the IRS with form SS-8
Meet with an attorney to draft clear contracts outlining the type of role you are hiring and to understand your boundaries in that role
Talk to your CPA
