Employees or Contractors? How to Make the Right Decision

Do you have more work than you can handle? Are you thinking of bringing someone on to help out? Ought to you hire them as an worker, or make them a contractor? Here are some points to think about:

First, the IRS common law rules: the IRS offers three categories to help choose the degree of control and/or independence & thus the proper classification of an individual - Behavioral, Financial & Relational.

- if the details of the work performed are the key to evaluation, then the individual ought to probably be made an worker,

Behaviorally,

- if the final result alone is the key to evaluation, then the individual ought to probably be thought about a contractor.

- if the employer controls the schedule & resources, then the individual ought to probably be made an worker,

- if there is no set schedule & the resources are owned by the individual, then the individual ought to probably be thought about a contractor.

Financially, the greater the potential for the individual to lose money due to the work performed (for non-reimbursed expenses such as tools), the greater the likelihood that they ought to be thought about a contractor.

Second, the tax liability: employers must bear the tax burden for workers (by FICA & state/federal unemployment taxes), while the individual must bear the tax burden as a contractor (by self-employment tax on their own tax return). Either way, employers are responsible for filing the appropriate paperwork (W2 for workers & 1099s for contractors). Employers must keep an I9 & W4 on file for all employees, & a W4 for all 1099 contractors.

Relationally, in case you hire the individual with the expectation that the relationship will continue indefinitely ( than for a specific project or period), the individual ought to probably be thought about an worker.

While lots of employers try to keep away from taxes by classifying workers as 1099 contractors, it is important to review your company's growth plan to exactly implement a staff structure that is effective on both an operations & tax basis. Beware that the IRS looks for improper classification by employers looking to keep away from taxes through contractor designation.

Ultimately, work classification is regulated & correctly ruled by the IRS. If the IRS determines that an worker was incorrectly classified & paid as a 1099 contractor, the employer will be subject to pay the backup withholding tax for that person.