With characteristics that make them different in the IRS’s eyes, contract workers and employees don’t share the same tax implications. Although hiring one or the other might be better for you as an employer, understanding those tax implications is crucial if you’re to make an informed decision about who you hire.
With guidance from accountants in Fort Lauderdale, ask yourself the following questions; if you answer yes to any of them, then you’ll probably be better off hiring an employee; if you answer no, then hiring a contractor might be the smarter solution:
Q: Will they work for the business for an indefinite period?
Q: Will they be given instructions as to where, when and how to work?
Q: Will they carry out tasks according to a schedule you have set for them?
Q: Will it be necessary for them to come to your physical office?
Q: Will they be required to use your supplies or equipment?
Q: Will they be permitted to work for other companies outside of your own?
Q: Will they carry out activities on a daily basis that are central to the way in
which your business operates?
Q: Will they need to be trained?
Q: Will they be paid an amount that’s fixed, and work to a fixed schedule?
Q: Could they quit or be fired at any time without cause?
A closer look at the difference between employees and contractors:
How a worker is classified, determines whether the employer must:
- Withold income taxes and Social Security and Medicare taxes from their compensation
- Pay their share of the above taxes along with unemployment tax on the employees’ wages
Definition of an employee
According to the IRS, there are 3 basic ways of determining whether a worker is classified as an employee or an independent contractor:
- Behavioral control
Whether the business has the right to control and direct how the work the person is being asked to carry out, is completed.
- Financial control
Whether the business provides tools for the worker and covers the cost of business-related expenses.
- Relationship of the parties
Whether benefits are offered by the business, like vacation, sick pay and insurance, as well as the relationship’s permanence and nature of written contracts detailing the intended relationship between both parties.
Taxes for employees
Once an employee is hired, the employer must withhold the federal, state and local taxes of the employee, as well as their share of FICA taxes. Employers must also cover employer FICA taxes, federal unemployment tax act taxes, and in certain states: state unemployment insurance, or SUI.
Hiring an employee also incurs other costs such as benefits, overtime pay and workers compensation.
Employee tax forms
Employers must complete Form W-2 for every employee, and submit it to the Social Security Administration. Copies must also be given to each employee by the 31st January, once the year has closed out.
Definition of an independent contractor
If as an employer, you have no control over how a person carries out work you have asked them to do, and can only direct the actual result of the work, you are dealing with an independent contractor. usually classified as self-employed individuals, they pay their own taxes.
Contractor taxes
As a good tax preparation service in Coral Gables will tell you, the earnings of an independent contractor are subject to both income and self-employment tax, and payments to contractors don’t involve the withholding of taxes by the employer. Because of this, contractors are required to estimate their tax liability, and make quarterly payments throughout the year.
Contractor tax forms
To report the payments made to independent contractors, employers must use Form 1099 to detail nonemployee compensation.
By no means interchangeable, state courts and the IRS classify employees and contractors differently from a legal standpoint, and misclassification of any of your workers could see you forced to pay stiff penalties, back taxes, and other associated costs.
