What's the Difference Between an Employee and an Independent Contractor?
Whether you run a restaurant that’s been exploding in popularity due to genius marketing; or you operate a profitable web design consulting shop, you may be making a major error when it comes to classifying your workers. Specifically, you may be calling people who are really employees of your company “independent contractors.”
It’s easy to misclassify, especially when you’re expanding quickly. The very nature of being a small business owner means that you often grow by experimentation. It’s easier, and usually quicker, to pay a freelancer for contract work than it is to “officially” hire someone and deal with the headaches of workers’ compensation, overtime, employee rules and regulations and beyond.
But you also want to stay out of trouble and treat your workers fairly.
The official Health and Human Services (HHS) website explains how to distinguish employees from contractors: “a business may pay an independent contractor and an employee for the same or similar work, but there are important legal differences between the two. For the employee, the company withholds income tax, social security, and Medicare from wages paid. For the independent contractor, the company does not withhold taxes. Employment and labor laws do not apply to independent contractors.”
So how do you know which type of worker you have? In general, the answer hinges on how much control your company has over the worker’s time/work/resources, as well as the degree to which the worker depends on your business for income. Following are some of the more critical questions to ask yourself in deciding the employee/contractor issue:
• Do you control how your workers do their jobs? For instance, do you require your people to work on certain computers, or to report on certain days or for certain hours?
• Does the worker provide her own tools and supplies, or does she use yours?
• Do you reimburse the worker for expenses (such as gas mileage, hours in the car, etc.)? • Do you have a written agreement with the worker regarding vacation and sick days, insurance benefits and pension plans?
The Internal Revenue Service (IRS) offers insight about how to classify contractors or employees at its site on the subject. Texas also has specific unemployment and workers’ compensation laws that you should understand when classifying your workers.
• If you do have employees, you have to pay them on a regular basis unless you formally change the process. Both Texas and Federal law require that you stick to a schedule. • The employee also gets an hourly rate or salary; whereas a contract worker can be paid per job. • Employees get a W2 Form; whereas independent contractors get a Form 1099 for payments of $600+ in any given year. • Numerous Texas and Federal labor laws cover employees, but not contractors.
Do you need help classifying (or reclassifying) workers for your Dallas business? The experienced Plano business lawyers at Armstrong The Law Firm, P.C. are standing by to help. Call us now at 972-424-L-A-W-S (5297).