Employee Vs Independent Contractor

in Small-business

If I had to identify the single most important decision a business must make regarding how an individual is to be paid for the services he or she provides it would be classification of the individual as an employee or as an independent contractor.

Improperly classifying employees as independent contractors can create serious long-term liabilities for a business. If an individual that the business treated as an independent contractor is later determined to have been an employee by the IRS or the state of Florida, the employer can be held responsible for the payroll taxes that should have been withheld from the individual along with the employer taxes that would have been due, and the penalties for failure to pay these taxes.

Many new businesses look to reduce their costs by using independent contractors rather than employees to perform vital services. By using independent contractors they save on payroll taxes, workers compensation insurance, and employee benefits. Properly used independent contractors can save a business money, but be careful, just because you call someone an independent contractor does not mean they are one.

In general, an independent contractor is an individual who is in business for him or herself and maintains independence from the business he or she is performing the service for, whereas an employee works for and performs services under the control of the business receiving the service.

The IRS and the state of Florida base worker classification on "common-law" factors designed to gauge the amount of control the business has the right to exercise over the worker. Two frequently cited factors of an employee-employer relationship are that the business is maintaining the right to discharge the worker at will and / or the business is providing the worker tools and a place to work. By comparison, individuals who are truly independent contractors generally provide their own tools and work place, they have business licenses, and are engaged to complete specific projects and cannot be terminated without cause from a specific project. There are no hard-and-fast rules as to who is an employee and who is an independent contractor. All possible factors pertaining to the business's control and the worker's autonomy must be taken into account.

As you can see, there is no easy answer as to when an individual qualifies as an independent contractor. There is however no penalty or liability for misclassifying independent contractors as employees. As a general rule when in doubt the safest classification may be to choose employee.

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Steven Weil has 1 articles online

Nationally known tax, business, and financial consultant, Steven J. Weil, PhD, EA , is much sought after as a guest speaker and workshop leader. He has appeared on Good Morning America and is heard on South Florida radio with his "Daily Tax Tip." His PhD is in Business Administration and he is also enrolled to practice before the Internal Revenue Service. Steven teaches classes for various colleges and universities on business, tax and financial management. He has provided programs for large and small franchise groups ranging from key note address to hands on work shops.

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Employee Vs Independent Contractor

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This article was published on 2010/04/03