Independent Contractor vs Employee

As companies get started, they often delay hiring employees and instead use independent contractors. After all, once a contractor becomes an employee, the Company is now responsible for payroll taxes: federal income tax withholding; Social Security and Medicare (together, Federal Insurance Contributions Act (FICA)); and Federal Unemployment, not to mention new liabilities under the Patient Protection and Affordable Care Act (PPACA). Here are the general guidelines from the IRS:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)?

If you answer no to the questions above, you’re likely fine keeping the individual as an independent contractor. However, I recommend speaking with your accountant to get specific advice.