How to you know whether to classify someone you have hired as a contractor or employee? When you hire a new person on, you may consider making them an independent contractor. If so, you are not required to pay the payroll taxes associated with hiring a W-2 employee. But, the IRS imposes a large fine on companies that misclassify W-2 employees as independent contractors, so it’s very important to know the difference. Here are some factors to consider when determining how a new hire should be classified:
Are you dictating their work hours, where they work and how the work should be completed? Then you are most likely dealing with an employee. You would probably negotiate a scope of work and due date with an independent contractor, but you would not dictate when or where they work on the project. An independent contractor is essentially running their own business, so they would be responsible for setting their work hours. They would also use their own equipment and work out of their own home or office, unless meeting with you to specifically discuss the project. An independent contractor would also dictate how the project would be completed, while an employee would typically take direction from you.
Does the person work solely for you or do they have other clients? If they work solely for you, is it for a limited amount of time, or is it on-going? Independent contractors typically have multiple clients or they are only contracted to complete a specific project. If your new hire is coming into your office on a regular schedule and is available to work on projects as they come up, they should be considered an employee.
The IRS considers many factors when deciding if an employee has been misclassified, so for more information visit irs.gov.