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Independent Contractor vs Employee

It’s very important to take some time to determine whether you a hiring a worker who will be an independent contractor or an employee.

Independent contractors: are paid all of their earnings in a business to business transaction. The business that pays (which would be the employer if we’re talking about employees) is not required to pay or withhold any payroll taxes. That’s why so many small businesses like to classify workers as independent contractors – there are no payroll taxes. And that’s why the IRS pays a great deal of attention to this issue! (Independent contractors receive 1099s at the end of the year.)

Employees: are paid through the payroll. Their earnings are subject to payroll taxes, including both the employee and employer portion of FICA. (Employees receive W-2s at the end of the year.)

Deciding between the two: Unfortunately, a business owner doesn’t get to choose freely between the two options. Instead, the business owner is obligated to follow the IRS “behavioral, financial and type of relationship” guidelines to determine whether a worker is an employee or independent contractor. Misclassifying an employee as an independent contractor can be a very costly mistake – one that causes your business to fail.

Behavioral, Financial and Type of Relationship guidelines