Back
Knowing the difference between traditional employees and independent contractors is important for business owners, especially when classifying workers and filing taxes.
Finding the right employees for your business is critical, and sometimes it means being flexible. This flexibility can include things like taking on part-time employees or even working with independent contractors. What should business owners know about independent contractors, and how is it different to work with them instead of traditional employees?
What Makes Independent Contractors Different?
Instead of working for your company, independent contractors are self-employed individuals that offer services or goods to companies like yours for a set price. Because they are simply working with you on a project and not on the payroll full-time, you do not need to withhold any taxes from their earnings, and there is not considered to be any type of formal employment agreement.
However, this comes with concessions. Because independent contractors are self-employed, you cannot make certain demands of their time or how they complete their work. What does this mean?
What Defines Independent Contractors?
Because independent contractors operate under a separate set of tax rules, there are IRS standards for the difference between traditional employees and contractors:
- Do you require the employee to wear a certain uniform, use a certain piece of equipment, or make a purchase from a specific vendor?
- Are you in control of how and what the independent contractors are doing?
- How much financial control do you have over the worker? Are they in total control of their profits and losses and able to work with other businesses, or are you in a special arrangement?
- Are you offering benefits to your independent contractors, like paid vacation or health insurance?
- Is there a set date when your relationship will end, or is it considered to be indefinite?
The answer to one of these questions is not necessarily the defining factor in whether or not you are working with an employee or contractor. However, it can determine how the IRS sees your relationship. Things like dental benefits are typically expected in an employee and employer relationship, so offering them to an independent contractor would be very non-traditional and potentially and you up in hot water with the IRS.
Make Following Tax Law Easy with The Harding Group
Unlike other accounting firms, The Harding Group will never charge you for consultations and strive for open communication with our clients. We serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time as a small business owner, contact us online or give us a call at (410) 573-9991 for a free consultation. Follow us on Facebook, Twitter, YouTube, and LinkedIn for more tax tips.