Independent Contractors or Employees?

 Posted on January 16, 2015 in Employment Law

For a small business owner, one of the most important decisions he or she must make is how to acquire the help needed to run the company. An owner must choose between hiring employees, utilizing independent contractors, or some combination of both. It is very important to understand the difference between employees and independent contractors, as each classification carries with it different requirements and responsibilities.

According to labor and tax regulations, there is no single standard for determining employee or contractor status. There are, however, a number of factors which, when weighed together, may offer some clarification to an individual’s classification. The Internal Revenue Service (IRS) has divided the relevant considerations into three basic categories:

1. Behavioral Control

Employees typically have the details of their work controlled by an employer. They are directed how, when, and where to work, and may receive instructions on what resources are available to help them. They also may be provided with training on the manner in which the work is expected to be completed.

An independent contractor is likely to be allotted a great deal more freedom as to the specifics of completing assigned work. The final product is typically of more importance than following a particular method or work schedule.

2. Financial Control

Understanding who bears the responsibility for the monetary aspect of the work may also help determine if an individual is an employee. In most cases, employees are not expected to invest personally in a project, and incurred expenses are usually reimbursed by the employer. Additionally, personal profit or loss are not a concern for employees.

Independent contractors may be required to invest financially in their work, and often are not reimbursed for all expenses. Therefore, a contractor may be likely to realize a profit or absorb a loss to a much greater extent than an employee.

 3. Relationship of the Parties

Contracts and the offer of benefits also may be useful considerations to a worker’s status.  Health insurance, retirement investments, and vacation days are examples of benefits often made available to employees but rarely to independent contractors. In some cases, a written contract may be the only way to clearly indicate the relationship intended between the company and the individual. A contract often states, in clear language, whether the individual is an employee or an independent contractor.

Contractors or Employees at a Glance

According to the U.S. Small Business Administration, independent contractors typically:

• Use a separate business name and business accounts;
• Have employees;
• Advertise their business and keep business records;
• Have multiple clients which are invoiced for completed work;
• Maintain tools and resources; and
• Set working hours independently.

Employees usually:

• Work under the control and direction of others;
• Receive training for job related activities;
• Have a single employer and are paid regularly.

Independent contractors may seem attractive to a small business owner as the owner often realizes savings in labor costs, less liability, and increased flexibility in acquiring and limiting the working relationship. A business owner, however, must be sure that workers are classified correctly or risk serious financial and tax consequences.