In today’s environment with entrepreneurship exploding & the appeal of hiring people & not having to worry about collecting and paying taxes on their behalf, the contractor vs. employee debate has been a highly discussed topic. There is no doubt that you probably hear these two terms getting thrown around (sometimes interchangeably) all the time, but do you understand what the differences are? When is it really appropriate to hire a contractor over an employee… and vice versa? What are the tax implications? What does it mean for your business? What does it mean for the person that you are “hiring”?
According to the IRS, generally speaking “you must withhold and pay income taxes, social security taxes and Medicare taxes as well as pay unemployment tax on wages paid to an employee.” When it comes to an independent contractor, however, you do not have to typically withhold or pay any taxes. Furthermore, “an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.” Most of the distinction comes down to that – who controls the “whens,” “whats,” and “hows” of the work.
Need a visual to help paint the picture? No worries, we got you! Take a look at the chart below that breaks down some of the key differences between independent contractors and employees.
Now that the differences are a bit clearer, it is time to answer one of the biggest questions — “how do you choose?” Ultimately, the decision will be based on two main factors: business needs and business financials. Here are some questions that should help guide your decision:
- Do you need to have direct control and supervision over the new hire?
- Are you able and willing to collect and pay the necessary employment taxes?
- Are you able and willing to offer benefits (if applicable), like paid time off, medical, dental, etc.?
- Do you need to have direct control over the work schedule as well as location?
- How important is collaboration and teamwork in your overall vision?
If you answered “yes” to the majority of questions, then it is likely that your new hire should be classified as an employee. BUT, if you answered “no”, then a contractor may be the right solution for carrying out your company’s goals.
With the questions above in mind, let’s take a look at some scenarios to determine which classification would be the best fit:
- Your candle store has high foot traffic and you are in desperate need of someone to work the morning shift as a cashier.
✅ Did you guess employee? If so, you are right! You need this person to be on location for a specific shift.
- Your company is in need of a new website. You’d like to hire a web designer to complete this short term project.
✅An independent contractor would be the appropriate choice for this scenario. The web designer is only needed for a specific project. Further he/she is able to complete the work on his/her time (deadlines in mind) with no supervision.
- You need to hire a Chief Financial Officer (CFO) to oversee the company’s finances and give financial direction for the lifetime of your business.
✅ This is actually a trick question. An in office employee CFO is definitely the right choice for large corporations with robust financial needs. For most small and medium sized businesses, this might not be the best solution. This is one of those times where a virtual outsourced option could be clutch. Hiring a CFO as a contractor allows an organization to cut the robust full-time executive employment & benefit costs while still getting the benefits needed from the CFO role. This is a win-win for most organizations that don’t require the “full time, in the office” solution. (Shameless Plug 😀: If you are interested in learning more about virtual CFO services, please check us out and set up a time to chat).
So as you can see, there is no “one size fits all” approach. Having the proper knowledge about the key differences between employees and independent contractors allows you to make the very best decision for your company. The answer for most of us is normally a solid mix of both. We hope that you are able to take these tidbits of information and apply them so that your company’s goals are achieved in the most efficient and effective way possible.
Right Choice Accounting Solutions is proudly a black owned, CPA led outsourced accounting and tax firm. Right Choice offers a one-stop shop accounting and tax solution that covers high level strategy, accounting insights & analysis, financial statement preparation, tax planning and preparation, basic bookkeeping, and much more. Schedule your FREE intro call TODAY to learn more about what makes us the Right Choice for your accounting and tax needs.
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