Anyone who owns a small business knows that one of the most stressful management tasks is hiring.
Especially when you’re just starting out, the demands that come with finding great hires and managing employees – while juggling all other aspects of keeping your business afloat! – can be absolutely daunting.
And it doesn’t help that technical lingo can keep getting in the way.
One of the biggest mix-ups business owners face when making hires is which type of worker they need to bring on board: an employee or a contractor?
Though employee is often used as a catch-all phrase in everyday conversation, employees and contractors are actually very different workers when it comes to your business reporting.
So should you be hiring employees or contractors? And what’s the difference?
What’s the difference between employees and contractors?
The biggest difference between employees and contractors is how workers are paid.
What does employee mean in the technical sense? It's all about payment and tax structure:
Employees are put on your business’s payroll and get a W2 tax form at the end of the year.
This means that when employees are paid, taxes are already coming out of their paycheck: Each time an employee gets a paycheck, one-half of their Social Security and Medicare taxes are being paid by the employer. Additionally, employees often have access to better benefits than contractors do.
Think of a contractor as someone getting “straight pay.” What does that mean?
Contractors are “paid straight” instead of put on a typical payroll. Contractors receive a 1099 Miscellaneous Pay form instead of a W2 at the end of the year.
This means that when a contractor is paid, no taxes are taken out by their employer. Each time they're faced with tax season, a contractor will be paying all of their Social Security and Medicare taxes by themselves under a personal income tax.
What it means for your business: Should you hire employees or contractors?
Whether a worker should be considered a contractor or employee comes down to how they work.
If a worker is doing tasks assigned to them by a boss, showing up at hours set by their boss, and provided with the tools or equipment to do their job, that worker is an employee.
However, if a worker sets their own schedule, guides their own tasks, and uses their own equipment when working, they are a contractor.
A good rule of thumb is that if you’re hiring someone because they specialize in something that you can't do or manage, that’s a good indication that they’re a contractor instead of an employee.
If you need a bit more guidance on employees vs. contractors, the IRS offers a 20-factor checklist to help you determine if you should hire an independent contractor or an employee. Find the handy checklist here.
Or, need to talk it over with a specialist?
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