It’s Important To Know If Your Paid Help Is An Employee Or Contractor
Is your new paid help an employee or contractor? There are a few easy ways to figure out the answer – and that answer is important.
When you hire an independent contractor, you pay them an agreed-upon fee. Contractors (or freelancers) don’t get fringe benefits, and you don’t take taxes out of their checks. And of course, you don’t play the employer’s half of Social Security and Medicare.
You pay employees hourly wages or salary, plus you’re paying for Social Security, Medicare, unemployment insurance, and most of their Labor and Industries workers compensation insurance. If you offer fringe benefits – health insurance or a retirement fund, for instance – they are eligible for those, too. And under Washington state law, they also accrue paid sick leave for each hour they work.
So if you’re a business owner, it sounds cheaper to call your workers independent contractors, right? Well, if you want to pay them as contactors, you need to run through these tests.
How, When And Where
Do you have control over what the worker does and how they do it? Do you also specify the hours they have to work and where they work? Do you provide training? If you do, that worker is probably an employee.
Who Pays For What
Does the worker pay for their own supplies and tools? Are they responsible for their expenses instead of getting reimbursed? If they do, they are likely an independent contractor.
It’s right in the name – a contractor has a contract. A contractor and a company should have a written agreement on what type of work is being done and the fee being charged. The two parties can renew the contract, or alter it when new or different tasks arise.
It Matters To The IRS
If the Internal Revenue Service decides that someone you call a contractor is actually an employee, there are consequences. The IRS will make you pay all of the payroll taxes you should have paid (including the worker’s share, too), plus penalties. That’s what happened to Microsoft some years ago, but that wasn’t all. They also had to pay out millions of dollars for the stock options those workers would have earned as an employee benefit.
If you’re hiring an independent contractor, have them fill out a W-9 form so you can send them a 1099-NEC form (which replaces the 1099-MISC starting in 2020). Employees need to fill out a W-4 form.
Reuters has an article about the Microsoft contractor vs. employee case.
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