Hiring for your business, Part 1: Contractors vs. employees

It’s important to classify your workers correctly, mostly to stay on the good side of the IRS and other tax agencies. For payroll tax purposes, workers are generally classified as employees or independent contractors. So what’s the difference between an independent contractor and an employee?

For employees you pay payroll taxes (like Social Security), but for contractors you don’t have to. A few simple questions can help you determine whether the person you’re hiring is an employee who will need a tax form W-2 or an independent contractor who will need a tax form 1099.

  • Will the work be performed on company premises?
  • Will the individual work only for you?
  • Will you provide tools for your worker to do his or her job?
  • Do you control the hours the person works?

If you answered “yes” to any of the questions above, odds are you’re hiring a W-2 employee, and not a 1099 independent contractor. For more detailed information on how to classify a new hire, check out the IRS’s Publication 15-A.

While it’s tempting to pay someone as an independent contractor since it’s less expensive, it could get you into trouble later. In fact, the IRS has started cracking down on employers who classify their workers incorrectly. This article in the Wall Street Journal describes what can happen to businesses that try to avoid payroll taxes by classifying employees as independent contractors.

Classifying your workers correctly can save you a lot of headaches in the future. But these simple questions can help you start clarifying what can be a hard decision.

About Shelly King

Shelly King works for Intuit as a member of the QuickBooks for Mac team. She’s the Managing Editor for Little Square and its main contributor. Shelly grew up in the South until 1994 when the Internet called her to Silicon Valley. She’s done a lot on the web ever since. Little Square was her idea. Yep, it’s all her fault. See all of Shelly's articles

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