Hiring Employees & Contractors (Part 1)

Many business owners don’t realize this but the classification of your workers is very important. It will impact your tax obligations, who owns their work product, and more.

This is Part 1 (The Differences) of a four part series on hiring employees and contractors. You can learn more in Part 2 (Tax Responsibilities), Part 3 (Intellectual Property Issues), and Part 4 (Other Considerations).

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The Differences Between Employees & Contractors

When you hire someone, they will be classified as one of the following:

  1. Employees, or
  2. Independent Contractors.

With employees, you’ll have more control, but more compliance obligations. With contractors, you’ll have less compliance obligations, but less control. In the end, it doesn’t really matter what you say, it matters what the IRS says. So how do they make the determination?

The IRS Factors

  • Performance
    • Employee: If you exert a lot of control over your worker (such as when, where, and how they work), then the worker is more likely to be an employee.
    • Contractor: If your worker chooses when, where, and how to work, then the worker is more likely to be a contractor.
  • Equipment
    • Employee: If you provide equipment (tools, computers, etc.) for your worker, then the worker is more likely to be an employee.
    • Contractor: If your worker provides their own equipment, then the worker is more likely to be a contractor.
  • Payment
    • Employee: If you pay a worker on a regular, ongoing basis (especially without a termination date), then the worker is more likely to be an employee.
    • Contractor: If you pay a worker on a project-basis, even if the payments are in milestones, then the worker is more likely to be a contractor.
  • Benefits
    • Employee: If you offer the worker employment-style benefits (like health care or PTO), then the worker is more likely to be an employee.
    • Contractor: If you don’t offer the worker benefits, then the worker is more likely to be a contractor.
  • Term & Termination
    • Employee: If either party can terminate the relationship at any time, for any (legal) reason, then the worker is more likely
      to be an employee.
    • Contractor: If the parties’ termination rights are subject to a contract, then the worker is more likely to be a contractor.

Click here to continue on to Part 2 (Tax Responsibilities).

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*This article is very general in nature and does not constitute legal advice.