Understanding The Three Differences Between An Independent Contractor And An Employee
If you are the owner of a small business, there are several reasons why you may choose to hire independent contractors instead of employees. Independent contractors are not bound by a long-term work contract and they file their own taxes, so you will not have to bother with payroll taxes. However, simply claiming that someone is an independent contractor for payroll purposes can get you in trouble when tax season begins. You have to make sure that you treat the individual as an independent contractor by giving them certain freedoms that employees may not have. Below are the three main differences between independent contractors and employees.
How
When you are working with an independent contractor, you are paying for a service or product as opposed to labor. This means that, as long as the product fits your agreement for quality, the independent contractor is free to produce the product by whatever means they find appropriate. For example, independent contractors are free to outsource all or part of their projects, whereas employees are not free to do so because you are paying for the employee's labor and time. Of course, if you do not like how an independent contractor obtains their product, you do not have to continue working with them, but you cannot demand that they change their methods.
When
Independent contractors are free to work according to their own schedule. Of course, if they are working alongside you, then you can make appointments and create a schedule together. However, you cannot demand that they work a certain number of hours each week or that they complete all of their work between certain business hours.
Where
There are certain services that must be completed on your premises. For example, if an independent contractor is setting up your computer system, they will likely need to be in your office. However, other services, such as web development or design or content creation, do not demand that the individual is in your office. As such, independent contractors can work from anywhere in most cases.
The easiest way to ensure that you have a legitimate independent contractor relationship for tax purposes is to work with contractors who have set up companies of their own and have several clients. However, if you are working with an independent contractor who does not have a business set up, you can still make sure that they are classified appropriately by protecting their freedom of how, when, and where. For more information about the business taxation and logistics of hiring a contractor vs an employee, contact a local accounting firm.
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