04/ 11/ 2005
by Steve Strauss
It is often said that your employees are your most valuable asset, but they also take a lot of time, effort and expense.
One way to keep the value of employees without worrying about the details is by hiring independent contractors. Although an employee and an independent contractor often perform similar duties, your obligations towards independent contractors are much less in comparison to an employee:
- You need not provide an independent contractor with workers' compensation insurance.
- You need not match an independent contractor's unemployment insurance payment.
- Most importantly, you need not pay any portion of an independent contractor's Social Security or Medicare taxes (FICA.)
There are two main distinctions between an employee and an independent contractor. First, employees have to follow direction, whereas independent contractors must truly be independent; they get to decide how, when and where they work. You can oversee what they do and approve or disapprove of the project, but you cannot control the actual process of when and how they do it.
Here are some examples of sorts of instructions an employee would get regarding how to do work that independent contractors would not:
- Where and when to do the work
- Which equipment to use
- Whom to hire or assist with the work
- Where to get supplies
- Where to get additional necessary services
- What must be done when
Second, employees are exclusive, that is, they usually work only for one company and certainly never work for competitors at the same time. Independent contractors on the other hand must be able to offer their services, not just to one business, but to the public at large. Indeed, they often work for several similar businesses at the same time.
There are a few other factors that courts have adopted that go into determining whether someone is an employee or independent contractor. They are:
- Training. Employees are usually trained to perform services in a specific way.
- Finances. Unlike employees, independent contractors usually have unreimbursed, tax-deductible expenses.
- Equipment. Independent contractors have usually invested in equipment and facilities in order to do the job. Employees do not.
- Benefits. Providing employee-type benefits like health insurance, pensions, vacation days or sick pay usually indicates an employer-employee relationship.
- Length. If the business relationship is expected to continue indefinitely, this is evidence of an employer-employee relationship.
Make sure your independent contractors really are independent. You may be tempted to save money and hassles by saying that the position calls for an independent contractor, but if the person is really an employee (because they are not truly independent) the results can be severe.
If you get caught (and you will probably get caught), not only will you owe back taxes and interest and penalties to the IRS, but you very well may owe money to the employee for lost benefits. On top of that, you will also likely get in trouble with your state's labor department. All in all, taking this shortcut is a mistake to avoid.
