Independent Contractor Versus Employee
The primary reason a small business owner would prefer to utilize an independent contractor rather than hire an employee is to cut down on expenses, especially the tax burden. An employer’s tax liability is contingent upon the status of their workers. When a worker is classified as an employee, the employer must pay certain taxes, such as state and federal unemployment tax, social security tax, and workers compensation. But when a worker is an independent contractor, the small business owner would not be required to make these payments, as the “employer” is actually just utilizing the services of a self-employed autonomous contractor.
So you can imagine that many small business owners prefer to use independent contractors! However, there are some pitfalls. Often, small business owners will think they are using an independent contractor, but are mistaken in their classification. This mistake can have consequences. A small business owner may find themselves liable for past taxes, such as FICA and federal unemployment tax. No one wants to deal with the IRS because they were mistaken in how they classified their workers!
While the definition of independent contractor is far from set in stone, consider these factors to determine if a worker is an independent contractor or an employee.
- Instructions: Employees must follow instructions about how when and where to work, whereas an independent contractor has more autonomy and independence.
- Training: Training is provided to employees, but not to independent contractors generally.
- Nature of the work: Is the nature of the work provided integral to the business? If so, you probably have an employee on your hands.
- Services: Services by an employee are provided directly by that employee, whereas an independent contractor may delegate work.
- Continuing Relationship: Independent contractors are generally temporary parts of your workforce, whereas an employee is in a long-term continuing working relationship.
- Hours of Work: If you set the hours of the worker, that worker is likely an employee. Independent contractors have more autonomy.
- Employer’s Place of Business: If the work is required to be done at the employer’s place of business, that worker is likely an employee.
- Tools and Equipment: An independent contractor is more likely to provide their own tools and equipment.
- Working for Multiple Outfits: Independent contractors are more likely to provide services to multiple businesses, unlike employees.
- Services Widely Available: Employees generally don’t offer their services to people beyond their employer, whereas independent contractors offer their services to the general public.
This is hardly an exhaustive list, and many other factors may be considered. But this can be a helpful resource when trying to determine if the worker you want to utilize is or is not an independent contractor.
Tim LeFebvre, Esq.