If you’re hiring help in your small business—whether it’s a part-time assistant or a freelance designer—there’s one key question you need to get right from the start: Are they an employee or an independent contractor?
This classification isn’t just paperwork. It affects taxes, legal liability, and how you run payroll. Misclassifying a worker (even by mistake) can lead to IRS penalties, back taxes, and audits.
The Basics: What’s the Difference?
Here’s a quick overview:
- Independent Contractors: Work on their own terms. You hire them for a specific project or time period, and they usually bring their own tools, set their own hours, and work with other clients too.
- Employees: Work under your control. You decide what they do, how they do it, and when. You also handle payroll taxes, benefits (if any), and provide the tools or workspace.
Why the IRS Cares
The IRS wants to make sure taxes are handled correctly. If someone is your employee, you’re responsible for withholding income taxes, Social Security, Medicare, and unemployment tax. If they’re a contractor, they handle that themselves. Misclassify someone, and it’s you—not them—who could owe back taxes and penalties.
Common Red Flags
Here are a few signs you might be misclassifying:
- You’re giving a contractor a regular work schedule
- You require them to ask permission for time off
- You’re providing them with equipment or supplies
- You treat them just like your employees (except on paper)
If it looks like a duck and quacks like a duck… the IRS may say it’s an employee.
How to Protect Your Business
- Get it in writing: Use a clear contract with independent contractors
- Review the IRS guidelines: The IRS uses a 3-part test: Behavioral, Financial, and Relationship control
- Ask your CPA: When in doubt, don’t guess—ask us to help you review the setup
Final Thoughts
Getting the classification right isn’t just about taxes. It’s about protecting your business from costly mistakes. If you’re unsure how your workers should be classified, J.A. Green Accounting is here to help. We’ll make sure your hiring decisions are smart, compliant, and backed by good documentation.
