A Key Question any Hire
Classifying workers correctly is essential for your business. Misclassifying an employee as an independent contractor or vice versa can lead to serious tax issues, penalties and legal risks. Understanding the differences helps protect your business and your workers.
Key Differences:
- Control: Employees typically follow your instructions on when, where and how to work, while contractors maintain control over how they complete their work and their hours.
- Tools and Equipment: Employees often use your business’s tools, while contractors usually use their own.
- Payment Structure: Employees are paid hourly or a salary on a regular schedule, while contractors are typically paid per project or invoiced at regular intervals.
- Benefits: Employees may receive benefits like health insurance and paid leave, while contractors do not.
Why Classification Matters:
- Impacts tax withholding and reporting requirements
- Affects eligibility for unemployment insurance and workers’ compensation
- Influences your compliance with labor laws
Tips to Stay Compliant:
- Review IRS guidelines under the Common Law Rules (behavioral, financial and relationship control)
- Use Form SS-8 if you need the IRS to determine worker status
- Keep detailed contracts with independent contractors outlining project scope and payment terms
- Consult with your accountant or attorney if you are unsure about classification
Final Thought:
Proper worker classification protects your business, keeps you compliant with tax and labor laws and ensures your workers are treated fairly.
