Independent Contractors or Employees? Which Is Better?

Do you recall your first job as a child?

Did you sell homemade lemonade or work at your local grocery store?

Were you your own boss or did you receive instructions on when to work and what to do?

Whatever the case was, we’re sure you were simply excited just to have money of your own and not rely on your guardians to get you what you wanted.

Fast forward to the 21st century and those workers still apply:

Independent Contractor or Staff Employee

Which one suits you? 

In this guide, we will share with you who staff employees and independent contractors are, the difference between the two, and how business owners rightfully determine which worker suits their company best as a staff employee or an independent contractor.

But first, let’s start with the basics: Who are staff employees and independent contractors?

Simply put, if you were the child whose first job was working at your local grocery store, then you were a staff employee.

Staff Employees are workers dictated by an employer who provides them a regular wage (weekly, bi-weekly, or monthly) with employee benefits. From those wages, taxes are deducted and they have a set schedule they must follow.

On the other hand, if you sold your own homemade lemonade you were an independent contractor.

Opposite of staff employees, independent contractors get paid for various projects, they care for their own taxes, and they work when and where they want. For tax purposes, the IRS considers them to be self-employed, which means they have to pay self-employment tax.

What is the difference between the employee and independent contractor? 

When it all boils down to the manner, to clarify these set workers, taxing is key to determine if a worker is an independent contractor or staff employee.

To tax or not to tax, that is the question:

If a staff member is classified as a staff employee, they need to withhold, deposit, report, and pay employment taxes. Social security, medicare taxes, and unemployment taxes are also included and must be paid on wages. Staff employees are required by the IRS to file special paperwork for business purposes.

If a worker is classified as an independent contractor, they aren’t required to file as much information. Since they are self-employed, independent contractors arrange and pay their own income tax quarterly, They aren’t given benefits, and they aren’t eligible for things like unemployment insurance.

How do business owners determine if they should hire independent contractors or staff employees?

Well, in all honestly, the IRS explains it best: there is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor. No one factor stands alone in making this determination.

Nevertheless, the key that determines the route of the business owner is the relationship they have with their workers.

It’s important to assess potential contractors based on three broad factors: behavioral, financial, and type of relationship.

Consider using the IRS test. If you’re on the fence about the workers you should hire, pause and ask yourself these questions:

  1. Behavioral: Does the company I run have control or 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?

Final Thoughts

Employees and independent contractors both play a vital role in a business, but it’s important to make sure you know the difference between the two so you can keep proper records and be able to account for these workers during tax time. 

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