This week in the Freedom Friday blog and email newsletter, we're continuing the series 10 Steps to Take Your Small Business to the Next Level in 2023, and this week we're discussing the seventh step to take your small business to next level, which is to hire your first independent contractor or employee.
Many times, when a small business is growing, you might consider hiring an independent contractor or even your first employee to assist in your small business. The Internal Revenue Service (IRS) requires you as a small business owner to properly classify any people working for your small business as either an independent contractor or an employee. If you do have employees, then they need to be further classified as either exempt or non-exempt, which determines your obligation to pay them overtime. Also, there is no such thing as an “1099 employee.” A worker is either an independent contractor who receives Form 1099, or an employee who receives a W-2. So, how do you determine if someone is an independent contractor or an employee? Glad you asked, here are six (6) factors to help you determine if a worker is an independent contractor or an employee:
Tools, Materials & Equipment
The first factor you should consider in determining whether someone is an independent contractor or employee is the tools, materials, and equipment. An independent contractor will often provide his or her own tools, materials, and equipment. However, an employee might use the tools, materials, and equipment provided by the business, or alternatively might be reimbursed by the business for purchasing tools, materials, and equipment. A business might make available to an independent contractor some tools, materials, and/or equipment, but if your new hire is required to use the tools, materials, and equipment you provide him or her, the new hire is likely an employee.
How and When the Work is Done
The second factor you should consider in determining whether someone is an independent contractor or employee is how and when the work is done. An independent contractor is generally free as to how and when the work gets done. There may be an agreement for a deadline when the project must be completed, but an independent contractor should be in control of when he or she works, where he or she works, and how he or she completes his or her work. Anyone who is required to work certain hours, at a specific location, or work on a task in a specific manner should likely be considered an employee.
The third factor you should consider in determining whether someone is an independent contractor or employee is training. The business should not need to train an independent contractor to do his or her job. If you have to train someone, then they're probably an employee.
Providing Services to Others
The fourth factor you should consider in determining whether someone is an independent contractor or employee is whether the worker can provide their services to others, e.g. more than one person or business. An employee would be limited to providing work or services to a specific employer.
The fifth factor you should consider in determining whether someone is an independent contractor or an employee is invoicing. Independent contractors should submit invoices to the business in order to receive payment for their services, instead of receiving a regular salary or wage for tracked time. An employee will often need to submit their time or work hours in order to be paid by their employer.
Permanent and Dependent
Lastly, the sixth factor you should consider in determining whether someone is an independent contractor or an employee is whether the worker is permanent and dependent. Generally speaking, independent contractors are hired for specific needs, rather than for an indefinite period of time. Also, an employee is usually dependent on the business for the primary source of income. However, an independent contractor should provide his or her services to multiple clients, and therefore is not dependent on the business for his or her livelihood.
It's also a good idea to have an attorney review or prepare any independent contractor agreements, employment agreements, and/or policies and procedures manuals which you may need or already have in place.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
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