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As a business owner, it is important to understand the difference between employees and independent contractors. Knowing the distinction is key to navigating labor laws, taxes, and other legal considerations. There are several criteria that determine whether a team member should be classified as an employee or independent contractor, so let’s take a look at these factors.
Tax Considerations
The most important factor when determining if a team member is an employee or independent contractor is how their taxes will be handled. Employees are considered “W-2” workers by the Internal Revenue Service (IRS), meaning that their employer withholds taxes from each paycheck and pays the appropriate Social Security and Medicare taxes on their behalf. On the other hand, independent contractors are considered “1099” workers by the IRS, meaning that they must pay estimated taxes quarterly and self-report income to the IRS.
Control Over Work
Another factor to consider when determining if someone is an employee or independent contractor is who controls their work. Generally speaking, employees of a company have less control over their work than independent contractors do. For example, employers typically dictate what hours employees need to work and which tasks they must complete. In contrast, an independent contractor has more control over when they work and what type of job tasks they perform for their client company.
Control Over Equipment
Finally, you should consider who provides the tools necessary for them to do their job—the employer or the worker themselves? Employers typically provide computers, office equipment, software licenses, etc., for employees to use in completing job tasks assigned by supervisors. On the other hand, many independent contractors provide their own equipment needed to complete assignments for client companies since they will not be working onsite with access to company resources like full-time employees would have access to.
Get to the Point: Determining whether someone should be classified as an employee or independent contractor can be complicated; however understanding this distinction is essential for businesses looking to remain compliant with labor laws and regulations set forth by government agencies such as the IRS . When in doubt about how your team members should be categorized , consult with legal counsel who can help you make sure you’re making the right decision. Such decisions can have long term implications not only on your payroll, but also on your company’s reputation as well. Being aware of this distinction will help keep your business ahead of any potential pitfalls down the road.
Contact Edmonds Law Office for help drafting your employment contracts and independent contractor agreements.