Independent Contractor Or Employee? Business Owners Need To Know
The way we work has changed so much: now we have the option to work remotely or on our own schedule and also have the option to use our equipment or the company’s to perform work tasks. The line between full-time employee and independent contractor is getting very blurry.
As a business owner, it is critical to pay people providing services correctly: either as an employee or independent contractor for your business. On top of that, a business must generally withhold income taxes, pay social security and medicare taxes, and unemployment tax. In contrast, a business does not have to withhold or pay any taxes on payments to independent contractors. Hiring a full time employee or a contractor means significantly different things for a business.
So, what are the criteria you can use to decide to pay your worker as a full-time employee or independent contractor?
3 factors that determine a full-time employee:
Does the company control or have the right to control what the worker does and how the worker does his job?
Are the business aspects of the worker’s job controlled by the payer (e.g., how the work is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
Type of relationship. Are there written contracts or employee type benefits (e.g., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
As a business owner, you will have to weigh all these factors when determining whether a worker is an employee or independent contractor.
Independent contractor:
People such as lawyers, contractors, and auctioneers, who follow an independent trade, business, or profession to offer services are generally not employees.
The general rule is that an individual is an independent contractor if the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result.
The biggest difference between a full time employee and independent contractor is the degree of control on how to get work done. Now let’s talk about employment tax.
What happens when you fail to file and pay for employment taxes:
In any of the situations below, you will be charged 5% to 25% penalties on the whole unpaid employment tax amount:
If the payroll tax deposits are not made on time
If the deposits are for less than the required amount
If the employer does not use EFTPS when required
In addition to any penalties, interest accrues from the due date of the tax on any unpaid balance. I highly recommend you use a professional service such as Intuit Full Service Payroll to guarantee all the work is done in the right way. We all know it is very important to pay payroll on time for the right type of taxes with the right amount.
Takeaway:
Based on behavioral, financial and work relationship factors, you can determine if the person who is providing service is a full-time employee or independent contractor. From there, you might also hire a professional payroll service company to help you file taxes. Now that you have all the right knowledge, I hope you will have more time to focus on your business and less time worrying about the payroll side!
