It’s essential as entrepreneurs to know the difference between an employee and a contractor when it comes to hiring workers.
I am not offering legal advice on who you should be hiring as that’s not my area of expertise. But I want you to be aware that the laws governing how to classify your workers are set at both a federal and state level.
Why does it matter whether I classify my worker as an employee or contractor?
This is a question I hear so often from business owners. A worker is a worker, right?
There are two main areas that differentiate whether your worker is an employee or contractor:
- Payment of Taxes
- How they work
If your worker is classified as an employee, you are responsible for filing and contributing to their taxes. These are known as payroll taxes, are determined at a federal and state level, and you’re expected to pay a portion.
If, for example, your employee owes $5 in taxes, you might contribute $2 and they will pay the remaining $3. I’ve also mentioned before how an employee earns a gross paycheck but actually takes home a net paycheck. The deduction of taxes from their pay is the amount you are legally required to contribute to as an employer.
Payroll taxes can be pretty complex. I highly recommend using a payroll company to keep track and make sure every legal requirement is being met. I’ve worked with a few payroll companies, and my absolute favorite is Gusto. They will absolutely make sure your taxes are filed and paid on time, and if you want to give them a try then you can click here. (Disclaimer, this is an affiliate link).
Hiring someone as a contractor
If you have a worker who’s classified as a contractor, you don’t need to be doing this. The IRS is hot on correct classification because this is what determines whether an employer must withhold income taxes. If your worker is not categorized as an employee, you’re not contributing taxes for them.
And if you’ve categorized them as a contractor incorrectly – the government calls this Tax Evasion.
It’s a fact of business life that the Labor Department will likely audit your business at some point. If you’ve incorrectly classified your contractors as employees, and so have paid extraneous taxes – the IRS won’t care. But if you’ve classified an employee as a contractor, and so NOT paid income taxes, then you’re in big trouble with Uncle Sam – and you’ll be expected to make those missing payments.
I’ve known entrepreneurs willfully miscategorize their workers as contractors in order to avoid contributing taxes. If this is something you’re interested in doing, then please move along. I am not here for that.
I want all of you to keep compliant when it comes to hiring workers and labor laws which is why I’m explaining the differences between employees and contractors right now.
Determining How your Worker Works
So we’ve covered the difference between an employee and a contractor when it comes to tax contributions and the IRS.
Now I want to explain the differences in how they are expected to work.
As an employer, you can determine how, where and when your employee works. You can set working days and hours. You decide whether you want them in the office and outline the exact tasks you want them to complete.
When it comes to working with a contractor, you only have a say in the results they produce.
A contractor is an independent business owner who you have hired for their particular skill set. It could be designing your website, setting up your email funnels or doing your bookkeeping.
With a contractor, you can outline the project you want them to complete. You can give them a deadline you need it by. But whether they’re working from their home office or a beach in Monte Carlo, during 9-5 or in the middle of the night, is none of your business.
Another key difference between hiring an employee or a contractor is that you can set the pay rates for an employee, but a contractor will usually tell you theirs. You can’t dictate a contractor’s behaviour. You can’t set their working conditions, or train them in the tasks you want done.
Sure, if you’re not happy with their work you can part ways, but you’re not coming in and evaluating their performance. This can be a very gray area for a lot of business owners, and I would urge you to send me a message if you have any questions surrounding worker classification.
There might be some situations where you need to be more picky with a project your contractor completes. If they’re designing your new website, you will of course get to tell them what copy you want to include, your brand colors, the pages you need. This doesn’t mean they suddenly need to be classed as an employee, because you’ve hired them for a particular one-off job.
Where the gray area becomes murky is when you’re hiring contractors to complete the work that you do within your day-to-day business.
If you run a cleaning company and hire your cleaners as contractors instead of employees – you’re misclassifying and breaking the law.
Am I hiring employees or contractors?
Take an honest look at what your workers are actually doing for you. If you’re controlling their working hours, location, task list and/or compensation, then you’ve got an employee.
I get that it can be a lot of gray to work through when you need to classify your workers. Make sure to check out my YouTube video to find out more about determining whether you’re hiring an employee or a contractor.
And, as ever, please let me know if you have any questions!
Check out my website to learn more!