What's the difference between an independent contractor and an employee? It's important to classify workers correctly.
For payroll tax purposes, workers are generally classified as employees or independent contractors. Whether a worker is an employee or an independent contractor depends on the amount of control the employer has over the worker.
What's the difference between an employee and an independent contractor? A worker's classification has certain payroll tax implications. Basically 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 (and will need a tax form W-2) or an independent contractor (and 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. Read the article at the Wall Street Journal.