05.1.18
Employee vs Independent Contractor

Your business has grown and now you need help. Congratulations! It should come as no surprise that there are rules to consider when deciding whether to hire an employee or an independent contractor to help you get the job done.

Obviously one over the other might be your clear choice. However, for many businesses, there is much consideration before deciding on what time of help to secure for the job.

For federal employment tax purposes, you’ll need to examine the relationship between the company and the individual performing the work.

Employee vs Independent Contractor

Worker Classification: This is important because it determines if an employer must withhold income taxes and pay Social Security, Medicare taxes, and unemployment tax on wages paid to an employee.

Businesses normally do not have to withhold or pay any taxes on payments to an independent contractor. The earnings of a person or company considered to be as an independent contractor would be subject to their own taxation. This part of the agreement can be compared to paying any type of bill for your business.

The “general rule” is that an independent contractor is given instructions on only the result of the work and retains control of how the work will be done as well as when it will be done. While there are many variables to take into consideration, one that seems to be consistent is the flexibility given to an Independent contractor.

Help with Deciding

The IRS suggests considering these three categories in order to properly classify a worker:
Behavioral Control, Financial Control and Relationship of the Parties.

BEHAVIORAL CONTROL:
When hiring an employee, you would be able to not only direct them on what tasks to complete, but also when to complete the task, where to complete the task, what tools to use, and even how you would like said task to be completed. In other words, you would control the details of their scope of work.  Even if the hired person is self-motivated and can proceed with little direction, if the right for you to control these items is available, the person is likely an employee.

Compare this to an independent contractor. If you hire a person to complete a task, but do not give any requirements as to when the work should take place (other than perhaps a deadline) this person could be considered an independent contractor.

Consider the degree of instruction, as more detailed instructions may indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Independent contractors ordinarily use their own methods, equipment, and tools to complete a task. If you aren’t particular about the details of how to complete the project, an independent contractor might be a good option for you.

However, if detailed training or periodic on-going training about procedures and methods is of interest to you, you should consider hiring an employee.

FINANCIAL CONTROL:
This item seems to be more cut and dry. If you are paying someone an hourly wage or a salary, they are likely considered to be your employee. Likewise, if your employee is able to be reimbursed for any out of pocket expenses. And while your employee may have a second job, you are providing them with a main source of their income.

When compared to an independent contractor, we see these differences:

  • An independent contractor provides their own equipment.
  • They are not likely to be reimbursed for out of pocket expenses, unless you have previously agreed to this as part of the original contract or even an addendum to it. Remember that an independent contractor has the ability to use their own tools and methods to complete the task for which you have hired them.
  • It is common knowledge that your independent contractor likely is providing work for businesses other than your own. Therefore, you do not maintain their financial control.

    RELATIONSHIP:
    The type of relationship depends upon how the worker and business perceive their interaction with one another. While a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status, it is still a great place to start.

    If your business plans to provide any employee-type benefits (insurance, pension, vacation or sick pay) you should consider this person to be an employee. An independent contractor does not typically receive any type of benefits and only payment for the work performed.

    Independent contractors typically have a specific project or period of time in which they are to provide service. If there is an expectation that the relationship will continue indefinitely, this could be perceived as an employee.

    There are many items to look at when considering what position to hire for your growing business. The team at Purk and Associates is always happy to help you evaluate the best option for your particular situation.

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