In today’s column, Bruce Freeman, who writes the Small Business Professor for Scripps Howard News Service, talks about the difference between hiring an employee or an independent contractor for your business.
Hiring someone as an independent contractor has some advantages; including the fact that the employer does not have to withhold or pay Social Security taxes on the person hired and payroll taxes would be less, says Marc Mittleman, a certified public account in Livingston, N.J.
The employee could still be subject to paying the taxes.
However, this is a gray area in the law. IRS rules dictate when and if an employee can be treated as an independent contractor. They fall into three general categories:
Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial. Are the business aspects of the worker’s job controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
Type of relationship. Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay)? Will the relationship continue and is the work performed a key aspect of the business?
If, after reviewing these categories, it’s still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. Either the employer or worker may file it. The IRS will review the circumstances. If it officially determines that the answers to the above questions are yes, then the new hire is likely an employee and not an independent contractor
The following are indicators of someone who might be considered an independent contractor.
The person being hired has separate insurance.
The person determines his or her own schedule.
He or she can hire people to assist in performing a task.
He or she bears the economic risk of cost overruns or other unforeseen events beyond his control.
If you are uncertain, consult an accountant or a lawyer.
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