Written by It’s tax season, and you know what that means… lots of businesses are scrambling to get their paperwork together to avoid any unwanted attention from the IRS. We’ve all heard the term “contract labor,” but what does that mean, and how does it differ from an employee? Don’t fret, my small business owners – I’m here to break it down for you in a way that’s actually kind of fun (I know, controversial statement when we’re talking about taxes). Grab a cup of coffee (or a stiff drink), and let’s dive in.
The first thing you need to know is that the employee vs. contractor classification is based on several factors, not just one. Here are a few questions you should ask yourself to determine whether your worker is an employee or a contractor:
Who controls the work?
If you have the right to control the worker’s actions on the job (when, where, and how they perform their duties), they’re likely an employee. If the worker determines those aspects, they’re more likely a contractor.
Who provides the tools?
If you provide the workers with the necessary tools and equipment to perform their job, they’re probably an employee. Contractors usually provide their own tools.
Is there an ongoing relationship?
If the worker is hired for a set period of time or project, they’re more likely a contractor. If there’s an expectation that their employment will continue indefinitely, they’re probably an employee.
Overall, the more control you have over when, where, and how the work is performed, the more likely the worker is an employee. If the worker has more control and autonomy, they’re usually a contractor.
Now, let’s talk about why this distinction is so important. When you hire employees, you must withhold certain taxes from their paychecks (like Social Security and Medicare) and pay the employer portion of those taxes. You’re also responsible for paying unemployment insurance and worker’s compensation insurance. When you hire contractors, you don’t have to withhold taxes or pay insurance – the contractor is responsible for those things.
However, just because you call someone a contractor doesn’t mean they actually are one in the eyes of the IRS. The consequences of incorrectly classifying workers can be severe – you could be on the hook for back taxes, penalties, and interest. So, always make sure you’re following the rules!
Another important factor to consider is how much control you have over the worker’s rate of pay. If you negotiate a rate with an independent contractor and don’t try to dictate what they charge, you’re likely in the clear. However, if you set a specific hourly wage or salary for a worker, they’re probably an employee.
One final thing to note: some workers are considered “statutory employees,” which means they’re treated like employees for tax purposes even if you consider them contractors. Examples of statutory employees include drivers and delivery personnel who work for you using their vehicles, as well as certain kinds of home-based workers. It’s important to know the rules for each type of worker to make sure you’re in compliance with the law.
Phew, that was a lot of information! The bottom line is this: determining whether someone is a contractor or an employee isn’t always clear-cut. It’s important to consider all the factors and make a well-informed decision. If you’re unsure, consult with a tax professional who can help guide you through the process. Remember, getting this right can save you a lot of headaches (and money) in the long run. Happy tax season!
Incline Business Essentials 