Do You Have an Independent Contractor or an Employee?Most small business owners like to hire independent contractors to perform services. The benefits of using an independent contractor as opposed to an employee is simply the small business owner doesn’t have to provide the additional benefits to the independent contractor that they would be legally obligated to provide the employee. They will pay the independent contractor for the work they have done and that is it.
However, using an independent contractor too often may change the relationship between the contractor and the business to the point where you consider them an employee. This would negate the savings sought by using an independent contractor and can result in penalties for not withholding the payroll taxes that the IRS requires held for all employees.
Luckily, there are three tests to help small businesses determine whether an independent contractor is an employee or not.
The first test deals with the behavior control the small business owner has over the independent contractor, what work that contractor does, and how they perform that work. The small business is more likely to evaluate the work the employee does throughout the entire process until completion. Independent contractors also tend to know how to do the job they are hire for and can complete it with little to no instruction.
The financial control over the independent contractor comes next. Independent contractors are in business for themselves and therefore do not exclusively work for one business. They spend funds to seek out clients and acquire the supplies and materials necessary to complete the work for which you hired them. In addition, independent contractors commonly receive a one-time payment when they provide an invoice to the small business for the work they have done while employees usually receive regular wages for the time they work.
The final test considers the type of relationship between the small business and the independent contractor. Small business owners usually hire independent contractors to complete a one-time job that while it helps the business to operate, it is not the main operation of the business. Moreover, unlike employees, independent contractors normally have to service their own benefits, such as health insurance or retirement savings.
Use these tests to help you determine whether you have hired an independent contractor or an employee. This will have you maintain control over your small business’s expenses and prevent you from getting into payroll tax trouble with the IRS.