Contractors vs. Full-Time Employees
Hiring employees is a typical practice for businesses, but there are more stipulations involved than you might think. Employment law has begun establishing fine lines between independent contractors and traditional, full-time employees. You may be thinking that’s great, but what does that mean for you specifically?
This year, the Internal Revenue Service (IRS) has begun cracking down on small business owners who are misclassifying workers for tax purposes. Whether it be intentional or accidental, doing so and then treating employees differently in the workplace, could subject you to penalties and back pay on your payroll taxes.
Generally, you are required to withhold and pay Social Security and Medicare taxes, along with unemployment tax on wages paid to an employee. However, normally you do not have to withhold or pay taxes on payments to independent contractors. The question is: Do you have employees or independent contractors?
The federal government identifies several distinct differences in employees versus independent contractors. Independent contractors are normally self-employed, usually hired on a project basis and have a voice in how the project is completed. Full-time employees, on the other hand, are normally employees who work for them every day or consistently and the work is mainly controlled (in what work will be done and how the work will be done) by the company or business for whom the person is working. The IRS looks to the relationship that exists between you and the person performing the services and much of that focuses on the degree of control and independence.
Three main factors are considered by the IRS, including: 1) Behavior: Does the company control or have the right to control the scope of the work or what the worker does and how the worker performs his/her job; 2) Financial: How is the worker paid (is it by the job, is it monthly/weekly?) and is the worker’s job controlled by the company (e.g., who supplies tools and materials and is the worker reimbursed for these? How are expenses paid? Who pays social security, workers’ compensation insurance, liability insurance or other insurance for the worker?); 3) Relationship: What is the agreement as to the relationship and how do the parties classify the relationship (are there benefits, vacation, sick time, etc.)? Also, how often does the worker perform work for the company (Is it per job, continuous, seasonal, depending upon the aspect of the business)? The more control a company or business has over a worker, the more likely the IRS will classify the worker as an employee.
Companies and businesses need to review all these factors to determine whether a worker is an employee or an independent contractor and to determine which category fits their business purpose best when deciding how they want to hire someone.
When choosing whether to hire a contractor or a full-time employee the company or business needs to decide what it needs to accomplish as a business. How is the workload? Would you like to have this employee around during normal office hours? Is the job they are being hired to perform something that needs to be performed on a regular basis or is it seasonal, sporadic or temporary. Would you prefer more or less control of the project?
Based on how you answered these questions, when you’re ready to hire, you’ll want to set yourself and your employee off on the right foot and you will want to make sure the relationship is clearly defined. Establishing employment guidelines (salary, the length of employment, etc.) and company expectations will protect both parties if something negative is to occur.
When hiring or trying to determine the status of current workers, it’s important to be accurate and confident in your decisions. If you have any legal questions or need any assistance in this process, give Durbin, Larimore & Bialick a call at (405) 235-9584. We’re here to help you set your business up for success!