In today's Freedom Friday blog and email newsletter, I want to discuss an issue related to the topics from the last two weeks. In last week's Freedom Friday blog and email newsletter, I talked about how to fire an employee in your small business. The week before I talked about hiring your first employee. In this week's Freedom Friday blog and email newsletter, I want to talk more about something I addressed last week and in the week prior, and that is, “What is the difference between an employee and an independent contractor?” Like I said last week and the week prior if you hire someone, and they are a 1099 contractor, they are an independent contractor, and NOT an employee. There is no such thing as a “1099 employee.” As a small business owner, you either hire someone as an independent contractor, and give them a 1099 for tax purposes, or you hire them as an employee, and give them a W-2 for tax purposes. But this begs the question I am answering today, “What is the difference between an employee and an independent contractor?”
First of all, what is an employee? Employees are hired to fulfill a defined role and perform specific tasks. Employees work regular hours, receive paychecks with tax deductions, and are generally protected by anti-discrimination laws. If your small business is their employer, your business controls what they do for your business, and also where, when, and how they perform those duties.
On the other hand, an independent contractor is hired to provide your small business with a certain result, but he or she will control how that result is accomplished. Independent contractors should use their own tools, set their own work hours, and invoice your small business for their work. You will pay some independent contractors by the project, but some will charge an hourly rate. Independent contractors are not protected by discrimination laws, and they are not eligible for overtime, medical coverage, or unemployment benefits.
Failing to properly classify your workers as employees or independent contractors can get your small business in trouble and expose you and your small business to liability. In Oklahoma, not only can this issue create tax liability, but it also can be a violation of Oklahoma's workers compensation laws. You may also find your small business in costly litigation if you did not classify your workers correctly. Here are six (6) factors to consider to correctly classify a worker as an independent contractor or an employee:
1. Tools, Materials & Equipment
The first factor you should consider in correctly classifying a worker as an independent contractor or an employee is tools, material, and equipment. As previously discussed, independent contractors should provide their own tools, but you will have to provide tools, material, and equipment to employees. While your small business might allow an independent contractor to use some tools, materials, or equipment, if you require them to only your tools, materials, or equipment, then they probably are an employee and not an independent contractor.
2. How & When the Work is Done
The second factor you should consider in correctly classifying a worker as an independent contractor or an employee is how and when the work is done. Independent contractors are generally free to decide how and when the work is done. There may be an agreement as to a project deadline, but someone who is required to work certain hours, at a specific location, or work on a task in a specific manner is probably an employee and not an independent contractor.
The third factor you should consider in correctly classifying a worker as an independent contractor or an employee is training. Your small business should not need to train an independent contractor how to do their job, but you will likely have to train an employee.
4. Can the Worker Provide Services to Others?
The fourth factor you should consider in correctly classifying a worker as an independent contractor or an employee is can the worker provide services to others. An independent contractor can provide services to others, but employees are typically restricted to perform one kind of work to a specific employer.
The fifth factor you should consider in correctly classifying a worker as an independent contractor or an employee is invoicing. Independent contractors should submit invoices to your small business in order to receive payment for their services. An employee will usually receive a regular salary or wage and also will usually need to submit his or her time or work hours in order to be paid by their employer.
6. Is the Worker Permanent & Dependent?
Lastly, the sixth factor you should consider in correctly classifying a worker as an independent contractor or employee is whether the worker is permanent and dependent. Independent contractors are typically hired for specific projects, rather than for an indefinite period of time. However, employees are usually dependent on your small business as the sole source of their income. Independent contracts are usually free to offer their services to other clients, so they should not be dependent on your small business for their livelihood.
If you are interested in starting a small business anywhere in Oklahoma, or you are interested in taking your small business to the next level, please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/