Three Things to Know About Independent Contractors Vs. Employees

Growing companies are increasingly turning to independent contractors as a way to cut costs. These business owners may be seeking to save on benefits packages or trying to avoid a large permanent payroll. While independent contractors can provide flexibility, there are substantial penalties if you don’t use them properly.

Why Independent Contractors Are Different

When you hire an independent contractor, you’re considered to be hiring another business, not an individual employee. This means that you deal with an independent contractor in a similar manner as you would a corporation you signed a contract with or a service professional who you visited in their office.

Because you’re dealing with a business, not an employee, typical labor laws, such as overtime, tax withholding, workers compensation and termination procedures, do not apply. As a general rule, you can do anything not prohibited by your contract.

When You Can Use an Independent Contractor

Independent contractors have typically been considered skilled professionals who provide services that aren’t part of your normal operations. Think lawyers, accountants and, in modern times, programmers. There are many other possible services that independent contractors can provide, but the key consideration is that they complete a task with limited training or oversight by you.

If you find yourself providing extensive training or step-by-step directions to a person you’re calling an independent contractor, you may be misclassifying an employee.

What Happens If You Misclassify an Employee as an Independent Contractor

The IRS is one of the biggest enforcers of employee vs. independent contractor classifications, because misclassifying an employee as an independent contractor means you aren’t withholding payroll taxes and the IRS isn’t getting paid. If the IRS determines that an independent contractor should have been classified as an employee, the minimum penalties include paying the back taxes plus interest and penalties.

In addition, business owners and other responsible officials may be personally liable for unpaid payroll taxes even if the business is a corporation or an LLC. For egregious violations, criminal penalties may also be imposed.

Don’t think independent contractors are right for you but need to free up cash flow to hire employees? Discuss your options with Merchant Capital Source today.

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