As a business owner, you might pay an independent contractor and an employee for similar – or even the same – work, but there are key legal differences between the two. If you hire workers, it’s critical that you correctly determine whether these workers are employees or independent contractors. Here’s some information to help you avoid misclassifying workers and all the problems that can come from that.
An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.
Independent contractor vs. employee
Whether your worker is an independent contractor, or an employee depends on the relationship between the worker and your business. Generally, there are three categories to consider:
- Behavioral control − Does your company control or have the right to control what the worker does and how the worker does the job?
- Financial control − Does your business direct or control the financial and business aspects of the worker’s job? Are the business aspects of the worker’s job controlled by you? Things like how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies all influence this determination.
- Relationship of the parties − Does your worker have a written contracts or have employee type benefits such as pension plan, insurance, vacation pay? Is the work relationship ongoing? Is the work performed a key aspect of your business?
Misclassifying a worker as an independent contractor hurts the worker because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If your business misclassifies an employee, you or your business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes.
Who is self-employed?
Generally, someone is self-employed if any of the following apply to them:
- They carry on a trade or business as a sole proprietor or an independent contractor.
- They are a member of a partnership that carries on a trade or business.
- They are otherwise in business for themselves, including a part-time business.
People who are self-employed, including those who earn money from gig economy work, are generally required to file a tax return and make estimated quarterly tax payments. They also generally must pay self-employment tax which is social security and Medicare tax as well as income tax.
Sometimes it can be tricky to determine if your worker is your employee, or if the worker is a self-employed independent contractor. If you need help with this, please contact our office. We can help you evalate your circumstances, come into compliance (if necessary), and prevent misclassifying workers in the future.