There’s a bit of confusion surrounding the differences between using “Independent Contractors” and W-2 Employees. Businesses cannot afford to make a mistake in this area by misclassifying a person as an Independent Contractor, when the person is actually performing the work as a W-2 Employee.
The biggest problem with misclassifying employment status is how employment taxes are paid and who pays them. Obviously, direct employees (“W-2’s”) are individuals who are paid directly by the employer; and while taxes are withheld from the employee’s paycheck, the employer also pays social security tax, Medicare tax, federal and state payroll taxes. Independent Contractors pay all their own employment-related taxes – as they are their own business.
Let’s use an example of hiring an electrician to rewire your home or business.
There are a few quick questions to help evaluate if the person is truly an independent contractor or if they are an employee:
Does the worker offer services to more than just your firm?
· The electrician is not an employee of yours – they are their own company providing a service to you (as well as to many other home owners).
Do you have to train the worker to do the job in a particular way?
· You would not be responsible for training the electrician how to perform the work (the electrician would have their own expertise).
Do you set the worker’s hours?
· You may be able to ask the electrician to show up at a timeframe that will work for you, but you wouldn’t dictate to the electrician how long they would have to stay, or that they have to begin work exactly at 8am or they’ll be docked pay!
Must the worker spend all of his or her time on your job?
· You also wouldn’t be able to restrict the electrician from doing work for other home owners or businesses.
Do you provide the worker with the tools / equipment to do the work?
· You wouldn’t provide the electrician with the tools (ladders, ammeters, PPE) to be able to do the job – they would have all the required equipment with them on their truck.
There are more questions to help assess the relationship. However, if you answered “yes” to any of the ones listed here, then it’s important to really evaluate whether you’re working with an independent contractor or you should be paying this person as a W-2 employee.