Is This Person an Employee or an Independent Contractor?
Bringing on a team is an exciting part of starting your own 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. Here’s a quick guide for determining whether the people around you should be considered employees or independent contractors.
Employees
Wages
Employees get paid a fixed rate for scheduled work. This may be a salary or an hourly wage, but regardless, they work 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 employee to equip them to carry out the tasks that they want. In return, they control the employee’s 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.
Independent Contractors
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.
Classifying your workers can be complicated. 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.
To learn how our team can help you through every step of your business setup, check out The Parsus Toolkit.
