When you need to staff your company, you have the option of hiring an employee or outsourcing the work to an independent contractor. Both options can get the work done, but there are key differences between the two classifications.
Whether an individual is classified as an employee or independent contractor also impacts your business taxes. Here’s what you need to know.
Employee or Independent Contactor?
It can be tricky determining if someone is an employee or an independent contractor.
A general rule states that someone is an independent contractor if you control only the expected outcome of the work; how the job will be completed and what tasks are necessary to complete the job aren’t under your control.
For example, if you hire an independent contractor to create a landing page for your website, it’s fine to say what content you want on the landing page and when you need the job done. You can’t tell the independent contractor exactly how they have to produce the landing page.
The IRS looks at three different areas when deciding if someone is an independent contractor:
- Behavioral control- Do you control how the person does the job and require them to follow strict procedures? They’re likely an employee, not an independent contractor.
- Financial control- Independent contractors are usually paid a flat fee for a project, while employees are given an hourly rate or other guaranteed wage.
- Relationship- An independent contractor works on a specific project, while an employee typically works for your company long-term.
The Impact on Your Business Taxes
Employees and independent contractors are treated differently on your business taxes. With an employee, you’re responsible for withholding state and federal income tax, Social Security tax, and Medicare tax. You’re also required to pay unemployment taxes and issue a W2.
For an independent contractor, you may need to issue a 1099 for certain payments that exceed $600. You’re not responsible for withholding money for their taxes unless the contractor is subject to backup withholding. Have more questions about how classifying your workers affects your business taxes? Connect with us today for professional assistance!
