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Which Might Look Like A Best Hire - A Contractor or Regular Employee?

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There seems to be a trend for companies to utilize independent contractors rather than hire employees onto the payroll.

Many employers mistakenly believe that the decision to classify someone as an employee or a contractor is solely at the discretion of the company.

The IRS has specific guidelinesto help employers understand the difference but not all companies know about or follow the rules.

There are a few things to consider when determining if the position should be classified as an employee or independent contractor.

If the position requires the employee to be directly supervised regarding how, when and where to do the job then there is no question that employee should be classified as a traditional W2 employee.

If the company only has the right to control or direct the result of the work and not the means and methods of accomplishing the result then the position can be classified as a contractor.

According to the IRS, there are 3 main categories that provide evidence of the degree or control and independence:

Behavioral: Does the company control how the worker does his job?

Financial: Does the company control things like how the worker is paid? Are expenses reimbursed?

Who provides supplies/equipment?

Type of Relationship: Are there written contracts or benefits (insurance, 401k, vacation pay, etc.)? Is the relationship temporary or will it continue?

Businesses must weigh all of these factors.

Some may indicate the person is an employee, while other may indicate the worker is an independent contractor.

There’s no set number of factors and no one factor stands alone in making the determination.

The key is to look at the entire relationship, and consider the degree to which the company directs or controls.

Making the incorrect determination regarding employee classification can have serious consequences.

If a worker believes they have been misclassified as an independent contractor they may file a complaint with the either the State or Federal Department of Labor.

If it is determined the misclassification was unintentional, the employer faces the following penalties:

  • $50 for each W2 that was not filed because of misclassifying the worker
  • 1.5% of wages plus 40% of the FICA taxes that were not withheld and 100% of the matching FICA taxes the employer should have paid; along with interest on each of these penalties.
  • Failure to Pay Taxes penalty equal to .5% of the unpaid tax liability for each month up to 25%

If the IRS suspects intentional misconduct or fraud, it can impose additional fines and penalties.

If you're still on the fence on wether to hire a contractor or regular employee, contact us today for a quick consultation. We have specialized in hr solutions for the past 9 years helping small businesses handle all HR matters.

Topics: HR Best practices Advice