How to Treat Employees vs. Independent Contractors
You’ve read our article on classifying your workers. You think you know whether your worker is an employee or an independent contractor. What do you do now?
If you decide to bring on the worker as an employee, make sure you pay the right taxes and follow employment laws.
- Taxes: Companies are required to withhold various taxes – like income tax, Social Security, and Medicare – from employee wages. The easiest way to do this is typically to hire a payroll company to run payroll and pay these taxes for you automatically.
- Tax Forms: You will need to get a W-4 from your employee when you hire them, and send them W-2s every year (payroll companies usually handle W-2s also).
- Control over Employee Work: You can generally control as much or little of an employee’s job as you desire – tell them what hours to work, give them specific instructions, whatever you want.
- Follow Employment Laws: There are many, many laws an employer must follow regarding their employees. To cover your bases, contact an attorney to review the laws applicable to your business.
For Independent Contractors
If you decide to hire the worker as an independent contractor, we recommend you talk to a lawyer to double-triple-check that they should not be an employee. If the worker is misclassified, you could open yourself and your company up to a lot of legal liability, and the consequences can be severe (more on that here). And if you still opt for the contractor option, make sure you use the correct tax forms, give the worker(s) enough freedom in their work, and have the right contracts in place.
- Taxes: You don’t pay any taxes for independent contractors, so you don’t need to withhold taxes from their payments. The independent contractor is considered self-employed, so they will need to pay their own taxes.
- Tax Forms: You need to issue the independent contractor a completed 1099 form each year. An accountant can usually help.
- Limit Control over Independent Contractor Work: Be careful not to dictate too many parts of the contractor’s work, because that could lead a government agency to determine that they should really be classified as an employee. Generally (there may be exceptions): don’t set work hours, don’t provide instruction manuals or employee handbooks, and don’t provide training for the worker – they should know (or learn) how to do the job themselves.
- Contracts: We highly recommend having a contract in place defining the worker as an independent contractor and laying out other rules (confidentiality of company material, liability for poor work, and so on).
Transitioning Independent Contractors to Employees
If you want decide to convert your contractors to employees, or if you have workers that you fear you may be misclassified, talk to a lawyer to figure out the best way to fix it. If improperly handled, the situation can lead to dire outcomes.