Small Business FAQ – Employee or Independent Contractor?

I need to hire people to help with an upcoming project. Are they considered independent contractors or are they new employees?

The amount of control you have over the workers you hire will indicate whether they should be classified as independent contractors or as employees. In general, if you tell your workers where, when and how to do their jobs you should classify them as employees.

You can classify your workers as independent contractors only if you have a minimal amount of control over their work activities. If a worker has their own business entity formed to offer their services, and they also offer these services not just to you but also to others, then they would be more likely to be considered an independent contractor.

For example, if you hire a specialty sign painter with her own business formed, workshop leased and several jobs in process for other clients, this worker would likely be classified as an independent contractor. If in doubt, err on the side of treating your workers as employees.

While classifying your workers as independent contractors can save you money in the short run (you don’t have to pay the employer’s share of payroll taxes, provide employee benefits such as health insurance or have an accountant keep records and file payroll tax forms), it may get you into big trouble if the IRS later audits you. The IRS may reclassify your “independent contractors” as employees and assess hefty back taxes, penalties, and interest against you.

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