Q: You’ve recently discussed how a business can determine whether it’s ready to hire their first employee and how to define the skills of the ideal person for the job. In my case, I’m ready to hire, and I know the skills and qualities I’m looking for.
What I’m unclear about is whether I should hire an employee or an independent contractor. Frankly, I just don’t see a big difference: I hire someone, they do what I need done and I pay them. So, what’s the big deal what you call them?
A: You’re not alone in wondering, but it is a huge deal, in more ways than one. Independent contractors don’t have the rights of an employee. Therefore, you won’t cover them in your workers’ comp and unemployment insurance nor pay the employer share of federal taxes. This means, if they get hurt on your watch they’re on their own. If there’s no work, they get no unemployment benefits. And at the end of year, they’re responsible for paying Uncle Sam the full tab of their taxes. Additionally, they have no right to minimum wage or overtime pay.
Another area where there’s a difference, is in the degree of control you want to exercise over the work. If you want to have a lot of say in how things get done, you should hire and employee, because –although you can set work standards for independent contractors- you generally wouldn’t “exercise supervision over the means and manner of their work”.
Lastly, if you incorrectly classify what should be an employee, as an independent contractor and are later found to be wrong, you will be subject to the unpleasant experience of having the IRS in your life. Not to mention having to pay owed back taxes and wages, and -if they find your violation willful- possibly paying additional fines.
Are you beginning to see why it’s a big deal?
Recently, the IRS issued an 11-factor test (condensing the previous 20-factor test), consisting of a series of questions to help employers correctly categorize an individual. I recommend you use it. Find it at IRS.gov
© Copyright Eva Del Rio
