Contractor versus Employee

Your organization has just won a contest run by your local bank offering small business grants for women owned businesses. You can finally expand your operation to fulfill the pent up demand in the marketplace. But what’s the first step? You need to add staff, but do you hire an employee or look for an independent contractor?
Independent contractors and employees are not the same, and it’s really vital that you be aware of the significant difference. Understanding this differentiation can help you determine what your first hiring move should be and also affect how you will withhold a variety of taxes and steer clear of costly legal penalties.

What’s the real difference?

An Independent Contractor:

  • Performs under a company name
  • Has got his/her very own staff
  • Keeps a different small business bank checking account
  • Markets his/her company’s services
  • Bills for work accomplished
  • Has got more than one client
  • Provides own equipment and also sets own work schedule
  • Maintains small business files

An Employee:

  • Carries out jobs dictated or managed by other people
  • Is provided training for jobs to be performed
  • Functions for only one workplace

Lots of small businesses count on independent contractors for their staffing needs. There are lots of good things about making use of contractors instead of hiring employees:

  • Savings in personnel expenses
  • Lessened legal liability
  • Flexibility in acquiring and terminating

Why Should It Matter?

Mistakes in classification of someone as an independent contractor may have a number of expensive legal implications.

In the event your independent contractor is determined to meet the legal meaning of a staff member, you could be forced to:

Reimburse them for income you should’ve compensated them within the Fair Labor Standards Act, not to mention overtime and minimum wage
Cover back taxes and penalties for state and federal taxes, Social Security, Medicare insurance and also unemployment
Take care of all misclassified injured personnel workers’ compensation benefits
Provide employee benefits, along with health insurance, retirement, for example.

Tax Considerations

Go to Internal revenue service Independent Contractor or Employee helpful guide to discover the tax ramifications of either situation, download and read and complete a form to have the Internal revenue service officially determine any workers’ standing, and locate related resources.

Employment Information

There isn’t a particular test for identifying if someone is surely an independent contractor or an employee using the Fair Labor Standards Act. Nonetheless, the subsequent guidelines ought to be taken into account:

  • The degree that the help performed are an integral part of the principal’s business
  • The permanence of the relationship
  • The degree of the assumed contractor’s investment in facilities and gear
  • The makeup and level of control from the principal
  • The claimed contractor’s options to make money
  • The degree of initiative, judgment, or foresight in open market competition with others that is required for the success of the claimed independent contractor
  • The level of independent company organization and operation

Whether or not an individual is an independent contractor or an employee in general will depend on the amount of control used by the manager over the function being performed. Read Equal Employment Opportunity Laws – Who’s Covered? to learn more about the way to decide if one is an independent contractor or an employee, and also which are covered according to federal laws.