Is This Person an Employee or an Independent Contractor?

Bringing a new team member onboard is an exciting part of growing your business. It’s great to share your passion with other people — and to be a part of supporting them and their families. But it can be complicated to decide what kind of team member they are.

It’s important to correctly classify your workers to avoid tax or legal penalties. We have compiled a quick guide for determining whether the people around you should be considered employees or independent contractors.

A look at what (Legally) defines an employee:

In general, an employee works under the direct guidance or management of the employer. There are four main factors that determine whether someone is an employee:

Wages

Employees get paid a fixed rate for scheduled work. This may be a salary or an hourly wage, but regardless, they work on a schedule that’s set by the employer.

Control 

In an employee/boss relationship, the boss has control over the employee’s schedule. This is largely because the boss puts time and effort into training the employees to equip them to carry out the tasks that they want. In return, they control the employees’ working hours. 

Taxes

When an employee receives a paycheck, the company has already withheld all applicable taxes, such as income tax and Social Security. 

Benefits

Employees, especially full-time employees, often receive benefits like health insurance and paid time off. They are also likely covered by workers’ compensation and disability policies. While these scenarios are not always the case, it is common for employees to receive such benefits. 

A look at Independent Contractors

Independent Contractor has more autonomy and flexibility and are free to work for other employers and their services usually involve projects that are temporary or have a specific endpoint.

Wages

Independent contractors get paid a set fee for a specific, specialized project. This fee model can vary, such as a fixed cost for an agreed upon deliverable or an hourly rate for consultations, but the bottom line is that independent contractors get paid for shorter-term projects, not long-term, scheduled work. 

Control 

When an independent contractor works with a business, the independent contractor has ultimate control over their schedules and work style. The business did not pour training or resources into the contractor, so they have little control over the way in which they work. 

Taxes

When an independent contractor receives a paycheck, there are no taxes taken out. It is the individual’s responsibility to pay taxes each year, and they must also pay self-employment taxes.

Benefits

Independent contractors do not receive benefits, like health insurance or paid time off, from the businesses they work with.

Many new business owners consider hiring part-time employees as "independent contractors" to avoid the administrative burden and expense related to setting up payroll, complying with employment laws, paying employment taxes, benefits, training, etc.

This is a very risky decision, and we highly advise against it, because an employer can be liable for employment taxes, back wages, unemployment claims, unpaid benefits claims, and lawsuits. Even companies like Uber and Lyft face legal battles because of the way they classify their drivers. To avoid this kind of dispute, it’s important to put serious thought into your classifications – and, ideally, consult with a corporate attorney to get a second opinion and set up the appropriate contracts.

If you are here, you may be interested in other common questions we get from new business owners! Click here to get the Parsus New Business Owner Guide, where we answer 5 questions that new business owners have!