Employee vs Independent Contractor

Stephen Ganns, http://www.GannsBlog.Wordpress.com, discusses the benefits of hiring employees or independent contractors. Anyone who owns a business, especially a small or medium business, will be faced with this dilemma from time to time. Is this person I’m about to bring on to my staff an employee or an independent contractor? There are certain criteria that the IRS has designed to help employers grappling with this question. 

All of the IRS recommendations or highlighted information concerning this boils down to assigning a preponderance of evidence one way or the other. While there are some things that automatically make someone an employee or independent contractor, this preponderance of evidence is what the IRS will go by in the event your determination is questioned by them..

Here are some of the factors that should be considered when hiring someone.

Independent Contractor

  • An independent contractor usually has more than one employer or client, so to speak.
  • Independent contractors are usually paid on a per-job basis, whereas employees get paid hourly or are assigned an annual wage. (Some independent contractors such as lawyers, accountants, etc. are paid on an hourly basis, but that does not automatically make them an employee.)
  • Will the independent contractor pay their own taxes and do they have any kind of license, whether it be a professional license, business license?
  • Do they have a separate checking account?
  • Do they have business cards?
  • The independent contractor has to get all their own insurances, etc.

Again, none of these specifically categorize an independent contractor. After all, anyone can go and get a business card. As I said earlier, the designation is based on a preponderance of evidence.

Employee

  • Does the business owner have full control over the employee’s schedule?
  • Does the business owner provide desks, computers, software, etc. for the employee to do work?
  • An employee must be the one who does the work. (Whereas an accountant or lawyer who provides independent contractor services, can delegate work to others within their firm.)
  • Is the individual trained and does the individual follow a certain set of rules established by the employer for the performance of their duties?
  • Does the individual only provide services for one company?

The IRS has an official 20-point checklist to help you decide (for a copy, click here). Remember the IRS imposes strict penalties for classifying workers as independent contractors if they really should be employees. SO BE CAREFUL!

Stephen J. GannsStephen J. Ganns, CPA
914-682-7007
steve@gannscpa.com
www.gannscpa.com

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2 thoughts on “Employee vs Independent Contractor

  1. This is a great blog Steve. The same thing holds true for household employers. So often the employees want to be classified as a sub contractor and receive a 1099 but in theory they are indeed employees and need a W-2. Thank you!

  2. Your remarks about an independent contractor are most interesting. Friend of ours is flouting this ruling for years (as do many, many more). The feeling is “they never catch us.”

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