Independent Contractors vs Employees
Does your business need to hire an independent contractor or an employee? Depending on the work involved, you may need the services of one or the other and you may even end up employing both at some point. Although these two types of business relationships may encompass the same kind or even very similar work for your business, there are important aspects of each that you should be aware of regarding hiring and managing one or the other. Moreover, there can be series legal risks to your business if the relationship is miscategorized or mishandled.
When it comes to employees, here are some important distinctions to keep in mind:
1 – The employer is accountable for withholding an employee’s income tax, Social Security, and Medicare payments.
2 – Employees are typically paid in either an hourly wage or an annual salary.
3 – Employee pay periods cannot be extended beyond their typical time limit, unless they are formally changed and paychecks must be provided on or before the accounted for time.
4 – Employees share their tax documentation with employers on a W-4 form.
5 – Annual employee earnings are reported on a W-2 form.
When it comes to independent contractors, here are some important differences from the employee standards discussed above:
1 – Taxes on wages are typically not withheld but the company will be responsible for helping create a Statement of Work dictating the job and how payment will be configured.
2 – Contractors can be paid on a basis of hourly, daily, weekly, or even a total sum for the work completed.
3 – Wage terms may be somewhat flexible and payments may be made pursuant to invoices received and the Statement of Work created when the business relationship begins.
4 – Independent contractors share their tax documentation with companies on W-9 forms.
5 – Companies need to report contractor’s annual earnings over $600 on Form 1099s.
In addition to the differences stated above, there are numerous factors that courts, agencies (e.g., the IRS) and other governing bodies use to make a determination whether someone is an employee or an independent contractor and the failure to properly categorize and properly treat someone as one or the other can be a costly mistake. For this reason, the factors should be closely reviewed and applied to your specific situation as the hiring company. It’s also recommended that they be reviewed with a competent lawyer familiar with this area of the law.
If you still have lingering questions over whether your business needs to rely on an employee or an independent contractor, or if you need help sorting out what legal matters you need to address for either, then please contact me! As a business attorney, I can help you keep your business’ legal documents and procedures up-to-date, with advice ready to help make your life easier.
The information presented here is for general educational purposes only. It does not constitute legal advice and does not create an attorney-client relationship.