As a small business owner, there are many important decisions to consider – how to form your company, where to operate, and who to hire to ensure that the company operates successfully. When considering potential workers, one important question is whether to hire employees or independent contractors.
Many employers choose to utilize both employees and independent contractors, and it can be fairly easy for both to exist side by side in any work environment. However, these different designations create different legal requirements and rights.
The Full Picture: Pros and Cons of Employees
Employees are typically afforded more rights and legal protections than independent contractors, but also have more allegiance to their employer. Unlike independent contractors who may work a wide range of jobs, employees typically work just one.
Depending on their status under the Fair Labor Standards Act, employees may be salaried or hourly, and may be exempt from overtime. Employees are also often entitled to benefits such as retirement plans and health insurance.
One of the bigger drawbacks in hiring employees as opposed to independent contractors is that employers must pay Federal Insurance Contribution Act (FICA) taxes on their behalf to the federal government, in addition to Industrial Insurance premiums (workers’ compensation), and unemployment compensation.
On Their Own: Independent Contractors
Unlike employees, independent contractors do not necessarily have any particular allegiance to their employers. They may work for multiple companies at a time, may work in an office or at home, and can often set their own hours.
However, they don’t usually receive benefits like health insurance, unemployment insurance, or a 401k. Additionally, they are required to pay their own income taxes. This means that employers do not have to pay taxes on their behalf, nor take taxes out of their paycheck. Independent contractors must take care of this on their own.
How Do You Tell The Difference?
While it might be tempting to classify all of your workers as employees or independent contractors, there are actually specific tests to determine which category a worker falls into. The question always revolves around control. There are several types of control to be considered:
- Control over the worker’s actions and task
- Control over the worker’s time and working conditions
- Control over the worker’s pay and ability to work for multiple companies
Generally, the more control an employer has over an individual, the more likely they are to be classified as an employee. Employers who dictate the work performed, when it is performed, and how it is performed exert more than enough control to meet this category.
Additionally, when in doubt know that the IRS’s default is to consider individuals employees. So if you are uncertain about where a worker may fall, it is safer to pay the taxes required for an employee. Wrongfully classifying an employee as an independent contractor can be devastating to a small business upon an audit, resulting in back taxes, Industrial Insurance premiums, or unemployment compensation premiums, in addition to penalties and interest.
Let the Business Lawyers At Blado Kiger Bolan, P.S., Advise You On The Legal Standards That Apply To Your Workers
Figuring out how to structure your business is never an easy determination, and there may be many competing considerations when evaluating whether to hire individuals as employees or independent contractors. At Blado Kiger Bolan, P.S., our business law attorneys can work with you to structure your business in the way most advantageous to you. For more information to discuss any questions you have, contact us online or at 253-272-2997.