This blog was written by Florencia Ramos, Senior Payroll Specialist at Helpside.
One of the beginning stages of hiring someone is determining whether that worker should be classified as an employee or as an independent contractor. It is very important to understand the difference between the two types of workers as misclassifying a worker can result in penalties and fines.
Common law test:
There are three specific, common law test questions that can help you identify certain aspects of the worker and can help classify them. Some factors may suggest the worker is an employee and some may suggest the worker is an independent contractor. Therefore, it is important to look at the entire relationship and consider the extent of the right to direct and control the worker.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker performs tasks?
- Financial: Are the business aspects of the worker’s job controlled by the payer? This may include how the worker is paid, whether expenses are reimbursed, who provides the tools/supplies etc.
- Type of Relationship: Is there a written contract(s) or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.). Will the relationship continue and is the work performed a key aspect of the business?
Employees are workers who work directly for an employer or business. The employer has direct control of the worker by setting times they are expected to work and their rate of pay. Employers must report and withhold the appropriate taxes such as income, social security, and Medicare taxes. Employers also contribute to FUTA based on employee’s wages. Failure to do so would result in penalties from the federal agencies and state agencies.
Employees can receive additional benefits such as vacation/sick pay, health insurance, pension plans, etc. There are many laws in place that govern how you should interact with your employees such as, workers’ compensation, anti-discrimination laws, overtime pay, and eligibility to receive FMLA depending on the company size and employment status of the worker.
Lastly, employees typically work for a business or employer indefinitely and receive hourly rate of pay or a set salary. Employees can be full time, part time, temporary or work as needed while still being considered an employee for the business.
An employer has control over what work the independent contractor must do but not how or when that work is done. Contractors will not have taxes withheld on the payments provided by the employer but will still be required to pay their own taxes. These types of workers are not eligible to receive benefits provided by the company such as vacation, health insurance or retirement plans. These types of workers are also not covered by any employment laws and cannot receive unemployment benefits upon termination.
Independent contractors typically provide their skills for a project or provide a service to a company. They can offer their work to the public market and are not restricted to working for one company at a time nor do they have to work a set schedule. They will generally have a contract that is set up between the employer and the independent contractor regarding the type of services or work that will be needed.
Some common examples of independent contractors are accountants, dance instructors, lawyers, interior designers, realtors, graphic designers, etc.
- When hiring a worker, you will need to ensure that proper paperwork is submitted. An independent contractor will submit the IRS Form W-9 while an employee will submit the IRS W-4 tax form. Keep in mind, Helpside requires additional onboarding paperwork to be submitted for employees and independent contractors.
- Form 1099-NEC (previously 1099-MISC) must be filed if a contractor was paid more than $600 during the tax year.
- An employee will receive a Form W-2 from their employer to file their individual income tax returns.
Questions to ask yourself:
- Are you paying them by the hour or per project?
- Are you providing the work equipment or are they using their own equipment?
- Is the relationship based on set terms from their contract or will they work with your company indefinitely until you decide to either let them go or they leave the company?
- Is the worker providing you with a specific business service need that requires constant work or is it an additional service?
Our team at Helpside can help you identify what information is needed to classify an employee or independent contractor. Reach out to us at firstname.lastname@example.org for more information.