Hire a Contractor or an Employee?

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Hire a Contractor or an Employee?

A Small Business Owner’s Guide: Hire a Contractor or an Employee? | Part Two


Hire a Contractor or an Employee?

Mistaking an employee for a contractor could cause you to have to reimburse the person for wages, pay the government back taxes and other benefits, or pay retroactive workers’ compensation if the person got hurt at work.


What’s the difference between contractors and employees?

Although the two may seem very different, an employee and an independent contractor have some similarities. It’s important for you, the small business owner, to know the difference even when the dividing line may be fuzzy.

View the infographic.

An employee has three characteristics that can be identified in most cases.

1) This person works for you exclusively in a specific job capacity. Of course, if they have a part-time job doing something else, that wouldn’t count.

2) You have trained this person to do a certain job for you. He or she did not have any (or much) prior knowledge of the job.

3) This person does tasks that are assigned by you or other superiors. He or she does not typically work independently.

Contractors are different on several levels.

1) Contractors work independently. This means that they have a business name and maintain their own records for taxes and other purposes.

2) Contractors might set their own work hours and have employees of their own.

3) Contractors typically have multiple employers or clients, providing the same service for all of them.

Why does misclassifying workers matter?

Knowing the difference between employees and contractors could save you time, frustration and money in the long run.

An employee is entitled to the benefits that you provide, and he or she has the added benefit of not having to file tax information, since you do that for them and provide a Form W-2 at the end of each year. An employee typically signs a contract or agreement to work for you for wages, so he or she works in a capacity to do what you require.

A contractor, on the other hand, does not place so much liability on you as the business owner because he or she assumes personal responsibility. You are not obligated to continue working with a contractor, so you can simply not hire him or her again rather than having to fire the contractor.

Mistaking an employee for a contractor could cause you to have to reimburse the person for wages, pay the government back taxes and other benefits, or pay retroactive workers’ compensation if the person got hurt at work.

Tax Requirements

You do not treat contractors and employees the same in terms of taxes and recordkeeping.

For employees, it is standard for the employer to withhold income taxes, Social Security and Medicare for each one. The employer then pays Social Security and Medicare taxes back out. It may also be necessary for the employer to pay unemployment tax.

Filing taxes for employees is a multi-step process. You can visit the Internal Revenue Service’s specific details about depositing and reporting employment taxes.

In the case of independent contractors, the employer typically does not pay any taxes on these people or withhold taxes from their pay. It is the independent contractor’s responsibility to do these things for himself or herself.

When working with a contractor, you will use Form W-9 or Form 1099-MISC. These forms ask for the contractor’s Taxpayer Identification Number and Certification.

Employment Information

A contractor is usually hired on a job-to-job basis. The contractor may even sign a new contract for each project that he or she begins with you. The benefits to hiring a contractor are mostly associated with the freedom to walk away from the business relationship if either party is unsatisfied.

You do not have to have just cause to end a working relationship with a contractor, nor does the contractor have to give you a reason to stop working for you.

An employee’s place in your small business is much more permanent. You have the freedom to tell the employee what hours to work and what method and schedule you will be using for payment of earned wages and overtime.

You must give an employee standards by which he or she should behave in a specific job. You must also provide reasons and sometimes even documentation (such as timecards) to fire an employee.

download complete guide to hiring and retaining employees

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Part One: Hire Your First Employee

Part Two: Contractor or Employee?

Part Three: Required Employee Benefits

Part Four: Pre-Employment Background Checks

Part Five: Employee Handbooks