Are you a business owner or employer looking to acquire the right talent for your team? You may notice that there is a large amount of independent contractors in the field looking for your business. As we continue to recover from a recession, many people who were once employed by large companies have now turned to working as contractors instead. They find that this gives them a better sense of control as they work to get ahead.
For employers, hiring independent subcontractors to do work by the project or by the season can actually be beneficial. You have to provide that you are aware of the differences between contractors and employees.
What is an Independent Contractor?
First of all, some people find it difficult to define the specific differences between an independent contractor and an employee. There are common law principles that help to make this distinction. These principles include how much control an employer has over a service or product and the method of compensation. Here are some of the guidelines you can use to define an independent contractor:
- The worker supplies his or her own equipment, materials or tools
- All necessary materials are not supplied by the employer
- The worker can be discharged at anytime and can choose whether or not to come to work without fear of losing employment
- The worker controls the hours of employment
As you can see, these guidelines would be entirely different for an employee of a company, where there is a more concrete and binding agreement in place.
Employer Tax Liability
In addition, the biggest difference between an independent contractor and an employee is the responsibility and liability for tax withholdings and filings that falls on the employer. For employees, employers must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. These payments are not required for independent contractors.
It is a very important distinction to make because there are some heavy consequences for employers who incorrectly define a worker as an independent contractor when you should consider them an employee. These consequences often include payment of past taxes and other penalties.
In conclusion, be sure to have the verification you need to prove the hiring of this person as an independent contractor. This will avoid any penalties or fines. Do you have questions about withholding or filing taxes for an independent contractor? Feel free to give Hacker Accounting a call for questions or concerns. We continue to help dozens of small businesses and self-proprietors throughout the Phoenix area with their tax and accounting needs. You can reach us at 602-375-5251.