As you grow your business, you ultimately find yourself in a position to need assistance regarding certain tasks and projects. These people can work with you for years on long-term tasks such as accounting or sales, or their expertise may only be needed for short-term projects such as creating your business’s website or creating a logo. When you hire people, it is important to know whether they are employees or independent contractors. Knowing when you are hiring employees vs. independent contractors ensures you classify them correctly for tax purposes, as well as follow the correct legal rules and regulations for directing the work, setting hours, and providing benefits. If you have questions about hiring employees or contractors, contact the experienced attorneys at Ferlito Law Group to discuss your hiring needs and how to best legally accomplish your business goals.
What Is an Employee?
An employee is hired to work for an employer with set hours, defined pay, and specific job duties. The employer has the legal ability and authority to direct how, when, and where these duties are done, including requiring the employee to report to a specific location, use specific company-provided equipment and work specific hours. The employer must pay and withhold money for taxes and provide assorted benefits to employees, such as health insurance or retirement accounts. The United States Department of Labor also requires employers to pay at least the federal minimum wage to employees and to pay overtime at time and one-half if the employee works more than 40 hours in a week. However, there are few restrictions on what kind of work you can assign or your ability to fire the employee.
Employees are also typically hired on a long-term basis to fill a position rather than for a temporary or short-term project. Employees receive more training when they are hired so they understand the business’s goals, culture, and how to do their job. They may also be cross trained to do other employee’s jobs so they can fill in during vacations or illnesses.
What Is an Independent Contractor?
A contractor also does work for a business but is typically hired for short-term or temporary projects rather than handling long-term duties. An independent contractor pays his or her own taxes and is responsible for providing their own benefits such as health insurance, retirement accounts, and health savings accounts. He or she does not receive overtime pay and does not have to be paid minimum wage. An independent contractor may negotiate pay with the business owner rather than just accepting whatever the business owner offers.
Independent contractors also usually only receive enough training to do the task or project he or she was hired to complete. The independent contractor also dictates when, where, and how the work is done, including working from home or another location, using their own equipment, and working hours that are outside of the business’s normal business hours.
How to Determine an Independent Contractor From an Employee
Sometimes there is confusion over whether a business is hiring employees vs. contractors. A business may hire a contractor for a longer project or to perform ongoing tasks. In other cases, a company might hire an employee for a short-term project or have them work remotely. When you are not sure whether you are hiring an employee or an independent contractor, it is important to take the time to ensure you are making the correct decision and classification. There can be significant tax, financial, and legal consequences of misclassifying staff and workers.
A few questions you can ask to determine an independent contractor from an employee include:
- When, where, and how is the work done? If the person completing the work determines where to work, what to use to do the work, and when to do it, they are probably an independent contractor. If you decide where they work, what they use, and when they complete the work, they are probably an employee.
- Is the worker doing full-time or ongoing work? Contractors are often hired for short-term projects such as website creation, while employees are typically hired to perform ongoing work for an indefinite period of time. There are some cases, such as some real estate agents, where someone is doing ongoing work but is classified as a independent contractor.
- Who is providing the tools/supplies to complete the work? One factor the Internal Revenue Service considers when determining an employee from a independent contractor is who is providing the tools and supplies needed to complete the work. If the worker is using their own computer, printer and paper, pens, software (such as their own subscription to Microsoft Office), and other equipment, they are likely classified as an independent contractor. If a business owner is providing the tools and supplies, or reimbursing the worker for them, then they may be an employee.
- Are they paid hourly, weekly, or monthly? Employees are typically paid on a regular schedule, based on the hours worked or a salary agreed upon. Independent contractors are typically paid a set amount for the entire project. The contractor may receive their payment all at once when the project is complete, or they may be paid when certain milestones are met.
- Is the work performed a key aspect of the business? If the work is essential to your business, such as answering phones in a call center, the worker is probably an employee. If the work is not essential to the business, such as cleaning your offices, then the worker is probably an independent contractor.
- Does the worker receive any employee-type benefits? If you provide any employee-type benefits such as health insurance, retirement accounts, paid time off, or stock options, the worker is probably an employee. If you do not provide any employee-type benefits and only pay the worker for the work they do, then they are probably an independent contractor.
- Is there an end date to the work or is the relationship continuing/open-ended? If the work will be completed by a certain date and there is little to no expectation of continuing to work with the worker after that, they are probably an independent contractor. If there is no specific end date to the work or you have other work you will provide for the worker to do once they finish the current work, they may be an employee.
An important thing to note is that there can be special circumstances that may classify a worker as an employee instead of an independent contractor, even though the answers to these questions might indicate they are contractor or vice versa. If you are not certain of a worker’s status, the qualified attorneys at Ferlito Law Group can help you go over the facts and circumstances of your specific situation, and help you determine whether your worker is an independent contractor or an employee.
Hiring Employees Vs. Contractors
Both employees and contractors can be appropriate for your business. Which one to hire depends on the need you are trying to fill.
You should consider hiring an employee if:
- You need to supervise the work.
- You need or want to have control over the work hours, tools and equipment used.
- You need the work done long-term.
- The work is essential to the business.
You should consider hiring an independent contractor if:
- The work is not essential to the business.
- The work can be done by an unsupervised professional.
- The worker has expertise or needs little supervision.
- The work is a short-term project to be completed in a defined period and there is no other work for the worker to complete.
Contact Ferlito Law Group To Learn If You Are Classifying Workers Correctly
Classifying your staff as employees or independent contractors is important. If not done correctly, you could face tax consequences, legal consequence, and financial challenges. When making decisions regarding hiring employees vs. contractors, you can start by asking the questions above and determining whether the factors of an employee or a contractor are more applicable. For certain answers regarding the classification of your workers, consider contacting the experienced attorneys at Ferlito Law Group to discuss your specific details and learn more.