It’s a known fact that unless you have serious angel investors, newer businesses have smaller budgets and larger start-up overhead. Big costs, such as renovations and office set-up often leave new business owners seeking ways to save money, cut corners, and get more for less. This need to break even and make a profit to pay back loans can have you wondering if the best way to save money on employment taxes is to hire independent contractors vs standard employees. Let’s take a closer look at this to understand what legally qualifies as a contractor to avoid penalties that could cost you thousands of dollars in misfiling fines.

Key #1: Understanding The Difference

  • What is an Independent Contractor?

By definition an independent contractor is someone who is self-employed and/or provides a general service for the public.  An independent contractor might be a consultant, a department director, or anyone else who comes in to do work with little or no direction from you.  An independent contractor often offers a specific service to your business and is usually not a regular employee, is an existing specialist in their field, and requires no training. This type of employee may be required to file a 1099 form as they work independently for your business.

  • Who is a regular employee?

Any employee that works under your direction and for your business (that does not offer a specific service), should file as a regular employee using a W-2 form. This regular employee may work full-time, part-time, or even seasonally but as long as they work under your direction exclusively they should file as your regular employee.

Key #2: Knowing The Importance of Filing Correctly

  • Why does it matter?

Independent contractors pay a self-employment tax and offer very specific services.  They may not reap benefits such as workers compensation, or health care provision from your organization.  If an employee changes her mind about working as an independent contractor upon realizing the cost and lack of benefits associated with an independent status, you could come under fire for incorrectly filing taxes.  Simply put, it’s illegal to hire employees as independent contractors when they aren’t truly independent.

Real World Example:

At Empire Tax, we worked with a daycare center provider who was sanctioned by the IRS because of an employee who filed as an independent contractor when they should have filed as a regular employee under a W-2 form.

New York State wrote the following about the employee:

1.     *Cynthia preformed services as a child care assistant.

2.     She is not an independently established business.

3.     You instructed her when and where the services were to be performed.

4.     You required her to work an established schedule.

5.     You provided her with all the supplies and materials necessary to do the job.

6.     She could not take time off without your prior knowledge and/or approval.

7.     She could not refuse work assignments, without consequence.

8.     When she was absent you assigned someone else to do her job.

9.     You established the rate of pay.

*The following description is from an actual government document.  We have changed the name of the client to protect his/her privacy. Cynthia’s employer came under fire for filing her as an independent contractor.

Use these two key pieces of information to guide you through your hiring processes for smooth sailing. Reac out to us if you have any questions, we’re happy to help you navigate any complex compliance issues such as these. Post your thoughts in the comment section below and share this article to spread the compliance love with colleagues, friends, or family members who are business owners!

Happy Safe Hiring!,

Empire Tax Professionals