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The Difference between a Contractor and an Employee

As a small business owner you will be faced with many difficult tasks and decisions.  That is because as a business owner you will have a variety of business responsibilities each day including accounting, marketing and human resources.  Employing a staff can also be costly if you do not classify your support team correctly.  There are tax penalties as well as other financial burdens for making this kind of mistake so it is helpful to know the differences.

Defining an Independent Contractor:

  • They have their own employees
  • They operate under a different company name
  • They invoice you for their completed services
  • They keep their own hours
  • They advertise their business’s services
  • They have more than one client

The benefits of hiring an independent contractor include cost savings for your bottom line.  They require less liability and provide greater flexibility to hire and fire them.  They will only be working when they have tasks to complete.

Defining an employee:

  • They are trained by you to complete their tasks
  • They only work for you
  • They are expected to fulfill duties designed and controlled by you
  • They are on your payroll and receive steady reimbursement

The IRS will determine the role that your staff has in your office with three different characteristics.  The first is behavioral control.  That means if you have directed or trained the person to complete their tasks then they are an employee.  The next criterion for an employee-employer relationship is financial control.  If you can change that person’s rate of pay then they would be considered an employee.  The last is based on the type of relationship you have with that staff member.  This includes the permanency of the relationship as well as whether the tasks completed are necessary to the business.

The danger in misclassifying a person as a contractor or employee can be severe.  If the person is an employee then you have to pay social security tax, state and federal unemployment tax as well as providing them with workers compensation insurance.  If you have been missing these obligations because you believe they are a contractor then you will be liable for past taxes.

If you have any concerns about what relationship you have with your staff, then you should seek the guidance of a legal professional.  Contact an experienced employment defense attorney in Schaumburg today before you are faced with any penalties for misclassifying a worker.

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