BUSINESS CENT$
Should You Hire a Contractor or an Employee? What’s the Difference?
• Savings in labor costs
• Reduced liability
• Flexibility in hiring and firing
Why Does It Matter?
Misclassification of an individual as an independent contractor may have a number of costly legal consequences.
If your independent contractor is discovered to meet the legal definition of an employee, you may be required to:
• Reimburse them for wages you should've paid them under the Fair Labor Standards Act, including overtime and minimum wage
• Pay back taxes and penalties for federal and state income taxes, Social Security, Medicare and unemployment
• Pay any misclassified injured employees workers' compensation benefits.
• Provide employee benefits, including health insurance, retirement, etc.
Tax Requirements
Visit the IRS Independent Contractor or Employee guide to learn about the tax implications of either scenario, download and fill out a form to have the IRS officially determine your workers’ status, and find other related resources.
Independent contractors and employees are not the same, and it's important to understand the difference. Knowing this distinction will help you determine what your first hiring move will be and affect how you withhold a variety of taxes and avoid costly legal consequences.
What’s the Difference?
An Independent Contractor:
• Operates under a business name
• Has his/her own employees
• Maintains a separate business
checking account
• Advertises his/her business'
services
• Invoices for work completed
• Has more than one client
• Has own tools and sets own hours
• Keeps business records
An Employee:
• Performs duties dictated or
controlled by others
• Is given training for work to be
done
• Works for only one employer
Many small businesses rely on independent contractors for their staffing needs. There are many benefits to using contractors over hiring employees:
An Articles by the
Small Business Association