Organizational Matters_ The Difference Between Employees and Independent Contractors

There are lots of factors to consider when trying to run a business successfully — equipment, marketing, distribution, sales, and much more. Amid all the things clamoring for a business owner’s attention, there’s one factor that always seems to be overlooked: the people who help keep the business operational.

With the rise in optimizing business performance by outsourcing talent from different specialists, the human aspect of most modern aspects has gone beyond hiring strictly full-time employees. Instead, many companies have brought independent contractors onto the scene, which has proven to lower operational costs when trying to solve one-time problems or make way for new solutions.

The importance of independent contractors

While the practice of bringing in independent contractors that can work alongside your actual employees is something that has given a huge advantage to many businesses, there are quite a few owners who are unable to differentiate between an independent contractor and an employee. Learning how to differentiate between the two isn’t just for common courtesy, but for facilitating operations properly and ensuring that costs are being tabulated correctly.

A staff member that’s classified as an employee is one that you have to pay employment, social security, and Medicare taxes for every month. One firm to consider in the whole employee-contractor fiasco and tax payment process is the IRS, which requires all businesses to file special paperwork for employees.

Why the IRS should be considered when classifying workers

The reason why the IRS is an important entity to consider when dealing with the legalities of contractors and employees (or workers in general) is that it audits your company and compares it to the information you provided. If there are discrepancies between the two, then the IRS will have to put your company under a scope to make it accountable for its suspicions.

Unlike your actual employees, independent contractors will have to handle their own quarterly income tax. They also don’t get to enjoy the benefits of healthcare and social security from your company and can’t avail of unemployment insurance. Misclassifying a worker, failing to submit accurate information, and incorrectly withholding taxes and benefits will cause the IRS to flag your business and require you to fork out extra cash for any money that they think you owe them.

How to differentiate between employees and independent contractors

In order to understand the IRS’ dichotomy system better, there are three tests used to distinguish between employees and independent contractors based on different factors: financial control, type of relationship, and behavioral control.

If these factors are unclear to you, here’s all you need to know:

1. Financial control

The IRS classifies workers who receive a regular company wage as employees, and workers who don’t as independent contractors. Independent contractors are paid a flat fee for their services as opposed to a regular monthly salary. Aside from the aspect of salaries, independent workers are also allowed to carry out work for any other businesses aside from yours, while employees typically cannot.

2. Type of Relationship

When trying to understand the relationship that your company has with its workers, the IRS will check on the nature of the work that they’re doing and see if they are given any benefits. If a worker does work that’s related to the core functions of your company and is given benefits, then the IRS will see them as an employee; if however, a worker carries out a specific task for your company that isn’t related to your core functions and isn’t given any benefits, then they will be classified as an independent contractor. Another factor that the IRS will use in identifying the type of relationship you have with a certain worker is time: if a worker has been hired to do regular work over an indefinite amount of time (which can span from years to decades), then they are an employee; however, if a worker only has to stay a few months with your company (or basically a finite amount of time), then the IRS will classify them as an independent contractor.

3. Behavioral control

Another way the IRS tries to determine if a worker is an employee or an independent contractor is through the degree of control that you exercise on their work life, time, and tools, all according to how they classify it. If the IRS notices that you’ve set specific hours, trained, and directed tasks for a worker, then they will classify them as an employee. An independent contractor sets their own hours and uses their own methods to get the job done.

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Alejandro Tavera