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Photo by Lauren Carnes<\/em><\/p>\n You\u2019ve decided you need help with your business and it’s time to pay an independent contractor or an employee to help you\u2014so which one should you choose?<\/p>\n Doing your research on the difference, you\u2019re inundated with terms like independent contractors, employees, FICA, Medicare, SUTA, 1099 and the dreaded T-word\u2014taxes<\/i>.<\/p>\n Interestingly, this is the one conversation I\u2019ve had with nearly every client I\u2019ve ever worked with. While it\u2019s a lot easier and simpler to classify your worker as an independent contractor, not withholding taxes and benefits when they should be classified as an employee doesn\u2019t just put an undue burden on your work at tax time.<\/p>\n If you misclassify a worker and don\u2019t withhold taxes and\/or benefits as you should or pay the required amounts, the IRS might come after you and your business to collect the money owed.<\/p>\n So not only do you have to be mindful of how to classify your worker, but you should be able to clearly establish whether they\u2019re an independent contractor or an employee.<\/p>\n Knowing how critical this information is, in this article, I\u2019ll help you:<\/p>\n First, let\u2019s tackle the two key terms of contractors vs. employees and identify their key differences.<\/p>\n Before we can identify the differences between contractors and employees, let\u2019s clearly define each term first to give you a better sense of what your worker(s) may be.<\/p>\n Independent contractors are considered to be exactly as described, independent<\/i>.<\/p>\n They\u2019re responsible for paying their own taxes, have complete control over their hours, and determine their own location of work. They choose when, where, and how they work.<\/p>\n As the person hiring an independent contractor, you only need to report what you\u2019ve paid them to the IRS at the end of the year. Even then, you only need to report what you\u2019ve paid the contractor using a Form W-9<\/a> and Form 1099-MISC<\/a> if it\u2019s in excess of $600 for the whole year.<\/p>\n Example<\/b>: Julie has hired Avery to be a second shooter for her photography business. Julie owns the business, and contracts Avery from time to time to help her with larger gigs.<\/p>\n In contrast to independent contractors, employees are not<\/i> independent.<\/p>\n Employees are hired to work for and become a part of your business, with you dictating their hours and location of work. An employee reports to you and you control where, when, and how they work.<\/p>\n In this case, if you\u2019ve determined your worker is indeed an employee, you have to withhold taxes from their paychecks and you\u2019re responsible for paying additional taxes to the IRS based on their payroll. The reporting requirements are much more extensive for employees, not to mention that outside of payroll, you have to take care of things such as human resources, health insurance, paid time off, and more.<\/p>\n Example<\/b>: You\u2019ve hired Samantha as your personal assistant for your marketing business. She comes into the office three days a week, gets paid an hourly rate, and works 9 to 5 each day. When she comes into the office, you direct her on what she\u2019s supposed to be working on and delegate each of her daily tasks.<\/p>\n The natural inclination for nearly every small business is to treat each worker like an independent contractor, since it\u2019s so much easier to handle and often much, much<\/i> cheaper.<\/p>\n Unfortunately, that doesn\u2019t fly for the IRS, state governments, and any number of other agencies\/businesses that are dependent on employees or who regulate employees.<\/p>\n To help make it easier and clearer for businesses what the rules are around hiring independent contractors vs. employees, the IRS has created a set of guidelines to determine whether the new resource you\u2019ve hired would classify as an independent contractor or an employee.<\/p>\n There are three common law rules they have in place to determine if the person performing the work for your business is an independent contractor or an employee:<\/p>\n Let\u2019s take a closer look at each rule and provide some examples of how they might apply to a graphic design business.<\/p>\n The first rule relates to the level of control over the worker\u2019s tasks and whether or not the business dictates their work.<\/p>\n Does the company control or have the right to control what the worker does and how the worker does his or her job?<\/p>\n Example: <\/b>Sarah is a graphic designer whose business is growing quickly. With constant influxes of new clients, she needs help updating her graphic design invoice template<\/a>, staying on top of her online invoice<\/a> schedules and payment reminder<\/a> emails. She also needs help with some of her graphic design work and wants to outsource some of her projects.<\/p>\n Sarah hires employee Michael as her administrative assistant, who reports directly to her and who takes direction from her on how to conduct his job.<\/p>\n Meanwhile, Sarah hires graphic designer Alice as an independent contractor to take care of work for her lower priority clients. Sarah does not<\/i> control Alice\u2019s work, since Alice takes care of the graphic design work herself.<\/p>\n The second rule around IRS guidelines involves a rule around different financial expenses the worker may incur and who incurs those expenses.<\/p>\n Are the business aspects of the worker\u2019s job controlled by the payer, such as:<\/p>\n Whether or not these are part of the worker\u2019s compensation clearly establishes their role.<\/p>\n Example: <\/b>Now that Michael is taking care of administrative work for Sarah\u2019s business as an employee, she is paying him an hourly wage of $16\/hour, 20 hours per week. She has reimbursed him for the cost of a laptop and a desk to be able to work from home and also reimburses him monthly for the cost of HoneyBook<\/a>.<\/p>\n On the other hand, Sarah does not reimburse graphic designer and independent contractor Alice for the cost of her Adobe Creative Suite software, since Alice has other clients and Sarah is only paying her on a per project basis.<\/p>\n Finally, the last rule around distinguishing between an independent contractor and an employee is around the type of relationship that exists between you and the worker and possible benefits.<\/p>\n Are there written contracts<\/a> or employee-type benefits that establish a pension plan, insurance, or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?<\/p>\n Example: <\/b>As Sarah\u2019s graphic design business picks up, she has managed to negotiate a group insurance plan and 401(k) plan for employee Michael. She also offers him two weeks\u2019 worth of paid vacation annually.<\/p>\n However, independent contractor Alice does not benefit from the health insurance or 401(k) plan, as she continues to work on a project basis and is not officially part of the company payroll and does not work regular hours for Sarah. She also does not receive any vacation time.<\/p>\n When asking yourself these three questions, if you\u2019re lucky enough to get a clear-cut answer as to whether or not your worker is an employee or an independent contractor, you\u2019re in good shape.<\/p>\n However, sometimes it\u2019s just not that clear, especially if your worker meets some of the criteria of the three rules set out by the IRS, but not all of them. If you\u2019re still unsure about your worker\u2019s status, the IRS advises you to look at the engagement as a whole and determine which best applies.<\/p>\n\n
Independent Contractors vs. Employees\u2014Defining Each Term<\/h2>\n
Independent contractors<\/h3>\n
Employees<\/h3>\n
Key Differences Between Independent Contractors and Employees<\/h2>\n
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#1: Behavioral control<\/h3>\n
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#2: Financial control<\/h3>\n
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#3: Type of relationship<\/h3>\n
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Making The Right Choice<\/h2>\n