So, you’re thinking about making a New Hire (Part 2)

In part 1 of the New Hire Series, we talked about how to know when you’re ready to hire a new employee (and not go broke in the Process) which you can find here.

Now the question is?

Who to hire, an independent contractor or an employee? And really what’s the difference?

Getting a new hire can be an exciting and terrifying proposition.  There is so much that needs to be done and you’re overwhelmed (and excited) but how do you know who to hire, a new employee or an independent contractor?

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Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

First, let’s determine what is an independent contractor.

What is an independent contractor?

The IRS defines an independant contractor as

Basically, what this means without the legal stuff is that a contractor is largely independent from the employer or business in which it’s doing some work.  A lot of businesses will muddy the water but think of these scenarios. 

Scenario 1 – Independent Contractor

Mary owns a Marketing company and contracted Mark to do graphic design.  Mary gives Mark the deadline, the formats needed, and what the client is expecting.  After which Mark works independently, at his own home office.  While periodically checking in with Mary.  At pre-determined times Mark sends Mary an invoice for the work.  Mary pays the invoice but doesn’t pay any taxes for Mark.   

This is what makes Mark a contractor.  He works his own hours; he is free to do the work anytime and anywhere.  He’s free to take on other clients.  He pays self-employment tax on his earnings. 

What is an Employee? 

In an employee relationship, the business maintains legal control of how the work is completed and all the details pertaining to the work relationship.   

Scenario 2 – The Employee

Mary owns a Marketing company and hires Mark to do graphic design.  Mary provides the tools and equipment needed to do his work.  Mary also pays Mark and pays all taxes associated with his employment.  As the owner, Mary has the legal right to control the details of how the services are performed.  

This is what makes Mark an employee. 

How do you know if you’re hiring an Employee or a Contractor? 

Now I know that this is confusing but believe it or not the IRS has come up with a test to determine if you’re an employee or an independent contractor. 

These are called the Common Law Rules 

What will determine whether you’re an employee or a contractor can fall into the following three categories.  This means if there is a question, they are going to use the following categories to make a determination. 

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? 
2. 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.) 
3. Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? 

Whew, that was a lot.  But let’s say you’ve gone through the IRS and your new contractor is a contractor.  Even more annoying is each state has its own employment rules. You’ll need to check with your state’s employment office to help you determine if you’re new hire is a contractor or can be considered an employee. 

Keep your payroll forms up to date with this payroll pack

Get the calculator and all the form you need to keep your employee information and keep them compliant for the government.

Putting it All Together

When you start to hire make sure you know if you are hiring an independent contractor or an employee by using the common law category test.  Check with your state on their rules to make sure you have the correct category for the state.  Never be afraid to ask questions the cost of doing it wrong is all the back taxes and penalization that come with doing it wrong (The IRS is no joke about penalties).   

And remember hiring a new employee takes time and patience but when you find the right one it’s totally worth it.   

Our next article will be on the paperwork needed to do payroll.  If you’d like to know more about the practical side of business connect with me on LinkedIn as I talk about business, taxes, and sometimes life in general.

Cheers!