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The Differences Between Independent Contractors & Employees

July 10th, 2013
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The Differences Between Independent Contractors & Employees

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Get it Right! Independent Contractors vs. Employees

As an employer, you are required to correctly classify those who do work for you as either an independent contractor or an employee. According to StartUpNation.com, the government is looking closely at businesses to make sure workers are not being misclassified. Many businesses prefer to hire workers as independent contractors to save time and money. However, StartUpNation.com says a businesses’ preference is not the determining factor — how much control a business has over a worker is. Ultimately, the IRS wants you to classify your employees correctly. When the IRS speaks, we listen, and advise you do the same. So let’s get it right!

Independent Contractors

In summary, an independent contractor is: classically a one-time worker who does a job for a fixed priced, someone who generally works for multiple companies, and someone who can’t be controlled with detailed direction. – The American Bar Association

If an employee is/does all of the following, they are also truly and should be classified as an independent contractor, according to Entrepreneur.com:

  • He or she sets his or her own hours.
  • Makes the rules for how and where their work will be done.
  • They use their own equipment and hire their own assistants as needed to complete tasks.
  • They send you invoices for their services.
  • There is a written independent contractor agreement between you and the worker.

As an independent contractor, workers are self-employed. For tax purposes, you must provide them with a 1099 form. Additionally, independent contractors have a defined relationship that typically ends when services are completed or when terms are met, as illustrated in a contract. They cannot be fired providing produced results measure up to the terms outlined in a contract.1

Employees

Unlike independent contractors, in summary, an employee is someone who performs services for you if you can control what will be done and how it will be done. With employees, you have the right to control the details. -As defined by the IRS. Miami Dade College’s Human Resources Department reported: an employee is required to comply with instructions about where, when, and how to work. Instruction may be oral or written.

If you hire employees, you must:

  • Pay their wages.2
  • Withhold income taxes. 2
  • Give them employee benefits (normally for full-time employees).2
  • Withhold Social Security taxes.2
  • Pay unemployment taxes.2
  • Pay state and local taxes.2
  • Offer sick/vacation days, health insurance, and retirement accounts (full-time employees).2

When you hire someone as an employee, a best practice is that you provide he or she with training by an experienced staff member. Employees also have set hours of work as established by you, the employer. Plus:

  • They are paid for their work by the month, week, or hour.1
  • You provide them with the tools and materials they need to do their job such as a computer and office supplies. 1
  • They have the right to end employment at anytime without incurring liability. 1

What happens if you misclassify? The government loses revenue, and as a result, it could cost you money. So, get it right! For more information on worker classification, visit the IRS website. For help filling positions at your company, contact us.

Sources: 1Miami Dade College, 2The American Bar Association and Entreprenuer.com.

 

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