We’ve talked before about why it’s so important to know the difference between an employee and an independent contractor (and the penalties for getting this wrong). But as I was deciding what this week’s blog post should be, I realized…we didn’t really discuss what is the difference between an employee and an independent contractor? As year-end approaches and you start making strategic plans for next year, it’s critical that you know how to make this determination.
The IRS considers a worker an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” If you think about it, this makes sense. An independent contractor must be “independent.” If you are telling a worker what to do, when to do it, where to do it, and how to do it, they’re not an independent contractor. They’re an employee. Even if the worker has some level of discretion (as most professionals do in this day and age), the key is whether or not you as the employer have the legal right to control what is being done and how it’s being done. In other words, are you paying the worker to accomplish a result, or are you paying the worker to perform a list of duties and responsibilities)?
Are you paying the worker to accomplish a result or to perform a list of duties and responsibilities?
Of course, like most things in the practice of law, it’s never as simple as results vs details. The IRS is cracking down on misclassification, and with the growth of the so-called gig economy, some states are even passing legislation to treat more workers as employees. The ultimate answer to the question “what’s the difference between an employee and an independent contractor” is it depends on the specific facts in your situation. How’s that for a lawyer answer?
As your business grows, you realize there are only so many hours in the day, and those 24 hours simply aren’t enough for everything that needs to get done: producing your product or service, marketing the business, making sure there is enough money to keep going, growing yourself as a leader and entrepreneur, etc., etc. At some point you simply need more help.
But taking on a regular payroll expense seems daunting and payroll taxes sound confusing and expensive. (After all, if you hire someone at $10/hr, it actually costs the business more than $10/hr…thanks Uncle Sam!) Many small (and some not so small) businesses in this situation decide to hire independent contractors instead. But is that truly the way to grow your business, or is it a trap waiting to spring?