Should You Be Hiring Employees or Independent Contractors?

When putting together a business plan, you’ll likely be planning for a day when you can afford to expand your team and start hiring people to work for you. As an owner, it allows you to delegate certain daily tasks and free up more of your time — without the company taking a hit. 

In today’s growing economy, we are seeing independent contractors, freelancers, and remote workers become extremely valuable to small businesses. While they haven’t completely taken over the workforce, they are starting to replace hourly employees in certain situations.

For businesses that have primarily operated with the help of employees, making the switch to an independent contractor might seem like the logical thing to do. The same goes for companies that are just starting to expand and want less risk involved with their hiring decisions. 

Unfortunately, there’s a large difference between hiring an employee and an independent contractor. Not knowing the difference can easily lead to some unwanted surprises when tax season rolls around. 

To ensure you don’t face any penalties with your small business taxes, we’re going to detail the differences between employees and contractors, as well as how they’ll affect your business. 

Defining an Employee

When you hire someone and classify them as an employee, they must receive a regularly-paid wage, receive benefits, have taxes withheld from their paycheck, and be required to follow a specified schedule that was agreed upon prior to hiring. 

Employees will often be classified as either part-time or full-time, with full-time employees receiving further benefits and often higher wages. 

In terms of taxes, the employer will be responsible for withholding the proper amount of taxes from the employee’s pay, as well as depositing, reporting, and paying employment taxes to the federal government. 

Defining an Independent Contractor

On the other hand, an independent contractor is someone who is often paid a fixed price by project — rather than by the hour. The attractive thing about independent contractors is the fact that they pay their own taxes and are classified as self-employed. 

When hiring an independent contractor, you will be giving up some control over the person. They will generally make their own schedule, have other clients they’re responsible for, and are brought on short-term. 

Here’s a simple way to look at it — employers that only control the result or outcome of work are dealing with a contractor. When you start to control how that work is performed and the matter in which it’s handled, then you’re dealing with an employee. 

How Does This Affect Your Business?

As a business owner, you not only need to know the difference between employees and independent contractors, but you also need to understand that classifying and filing them properly is what really matters. 

Failing to classify your employees or independent contractors correctly could lead to some massive penalties by the IRS when you file your small business taxes for the year. You will likely be subject to paying back-taxes and will be required to treat the employee or independent contractor correctly from that point forward. 

That means if they should’ve been due benefits, that employee should now receive those benefits. 

If you need more guidance when choosing who to hire and how to classify them properly, a certified public accountant is exactly what you need. Contact us today to learn more about the differences in employment and hiring options. 

References

“Understanding Employee vs. Contractor Designation.” Internal Revenue Service, www.irs.gov/newsroom/understanding-employee-vs-contractor-designation.

“What’s the Difference Between an Independent Contractor and an Employee?” ACF, www.acf.hhs.gov/css/resource/the-difference-between-an-independent-contractor-and-an-employee.