What Business Owners Need to Know to Classify Employees and Independent Contractors

Employees and independent contractors are different, so it is important for employers to be clear about the difference between the two. This will help them determine what to do when hiring people to help, and it will also affect how they withhold taxes to avoid legal trouble.

Independent Contractors Independent contractors have their own employees and usually have their own business name. They typically have a separate checking account for business, and they advertise their own business services. When work is completed, they normally send an invoice or have an agreement for payment. Independent contractors have their own hours, tools and clients. They keep their own business records as well.

Employees Employees are hired by a company to work for only that employer unless otherwise agreed. For example, some full-time employees may have a part-time weekend job elsewhere that does not interfere with their commitment to their full-time employer. Employees’ duties and assignments are controlled by the employer or supervisors, and they are provided with training from the employer for the tasks they need to complete. Small businesses often depend on independent contractors as workers. For small business owners, there are several benefits to using this approach. They do not have to spend as much for labor costs, their liabilities are reduced considerably and this gives business owners more flexibility for firing or hiring.

Classification Considerations Classifying an individual incorrectly as an independent contractor may have several legal consequences that are costly. If an independent contractor meets the definition of an employee, the business owner may have to reimburse that person for wages and overtime that would normally have been paid to them by the Fair Labor Standards Act. The business owner may also have to provide health insurance, retirement or other benefits normally offered to regular employees. Paying back taxes and other penalties would also be necessary, and workers’ compensation would have to be paid to any injured individuals who met the criteria for being employees instead of independent contractors.

Tax Considerations The Internal Revenue Service provides information on their site for companies hiring independent contractors and employees. This information is to teach them about tax implications of various scenarios. Site visitors can fill out forms to request that the IRS reviews their workers’ statuses and to provide additional resources. There are no one-size-fits-all tests to determine if a worker is an employee or independent contractor. However, the following considerations are useful in helping classify them:

– The permanency of the work relationship.

– The extent to which services provided are an integral part of the employer’s business.

– The amount of initiative in market competition determining the worker’s success.

– The worker’s investment in equipment and facilities.

– The worker’s opportunities for loss and profit.

– The degree of independent business operation and organization.

– The degree of control by the business owner.

Whether a person is considered an employee or an independent contractor will depend on the business owner’s amount of control over the workload and the individual. For more information about this topic and how to classify workers correctly or to make sure they are properly insured, contact ACBI.


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