Building the Team: What is the Legal Difference Between Contractors + Employees?

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Hey Creative Genius.

I hear that you’ve been working hard (yep, I cyber-snooped on you). Your business is growing. You are expanding the team. And, thankfully you followed the tips in my blog post about hiring interns. So, you already know the skinny on what interns can and cannot do.

I am so proud of you.

Now, let’s discuss the legal difference between independent contractors and employees, and how to choose one over the other (because making sure that you run a legitimate business keeps you up at night).

As you grow, you will be tempted to contract out morsels of your business on a project basis. Let’s be honest, you don’t want the burden of dealing with minimum wage, payroll taxes, unemployment insurance, and you don’t want to make a long term commitment.

I get it.

The reality is…neither the IRS or the court cares. They don’t give two craps about what inconveniences you in your business. Not even one.

That’s why you must understand the legal difference between independent contractors and employees.

Before you go slapping titles (the legal term is “classifications”) on folks all willy-nilly style.

The quick + dirty difference is that you control the time, place and manner of how employees work (and with independent contractors, you do not).

Ask yourself these questions. Go with your hunch, instead of trying to choose the “correct” answer:

-Is the work that you need similar to the type of work that the person performs in their own business?

-Is the work project-based (and not a long-term commitment)?

-Can the person set their own hours (in lieu of hours controlled by you)?

-Are you simply concerned with the outcome of the work (and not the process or procedures)?

-Will the person provide their own equipment?

-Will they work from their own location?

-Are they responsible for paying their own business expenses?

-Do they have clients other than you? Are you okay with that?

If you’ve answered yes to most of the questions, then you are probably looking to hire an independent contractor. Read on for the differences between the contractor and employee.

 

An employee:

-has an ongoing working relationship with you

-uses your equipment to get things done (i.e. laptop, phone, office supplies, etc.)

-may receive employee benefits, pension and vacation time

-is involved in the daily operations of your business

-works on site at your business location

-is typically paid hourly or salary

-usually works just for one employer and is restricted from outside work

 

An independent contractor:

-independently runs a business involving the same work that you are hiring them to perform

-has multiple clients

-will use their own supplies and equipment

-controls the “how’ of the job and provides you with the end product

-works from an independent location

-has a project-based working relationship with the business retaining their services

-controls their schedule

-submits invoices for work and is usually paid a flat fee or commission

-responsible for their own taxes

-are not eligible for unemployment benefits or worker’s compensation

This list provides a starting point to classify the people working on your team. The IRS has a 20 factor test that you should keep in your creative business arsenal as well. However, the final determination is always based on your specific circumstances.

Your inner-rebel may wonder why the heck this all matters.

Lawsuits for backpay. IRS penalties and fines. Enough said?

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