Step 1: independent contractor or employee?
Independent contractors and employees are not the same, and it's important for employers to know the difference. Knowing the difference is critical for tax purposes and for helping your business avoid costly legal consequences.
The main difference is the degree of control that an individual exerts over his/her work. Independent contractors have a high degree of control over the work they do, the hours they work, the supplies they use, will simultaneously work for multiple employers, and advertise their own business. In contrast, employees typically exert less control over their work, have duties assigned by the employer, are giving training for the work being performed, and typically only work for one employer at a time.
A list of differences:
- 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
Many small businesses rely on independent contractors for their staffing needs. There are many benefits to using contractors over hiring employees:
- Savings in labor costs
- Reduced liability
- Flexibility in hiring and firing
- Performs duties dictated or controlled by others
- Is given training for work to be done
- Works for only one employer
Why Does It Matter?
Misclassification of an individual as an independent contractor can have a number of legal & financial consequences.
If you erroneously classify someone as an independent contractor and they turn out to be an employee, you or your business 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.