In addition to their full-time staff, some businesses also utilize independent contractors to perform certain tasks and duties. It is important for business owners to separate these types of workers, or they could be subject to serious fines and penalties for misclassification.
While there are some similarities, there are quite a few differences between employees and independent contractors. Here are a few key points to keep in mind.
Employees of your business work for you on a regular basis, usually part or full-time. As a result of this work, you provide compensation in the form of hourly pay or a salary. This pay is typically provided on the same schedule, such as every two weeks. You provide assignments and work tasks to your employee, and you also dictate how the worker should perform these tasks.
When it comes to taxes, you must withdraw the proper amount from your employees’ paychecks. This includes taxes for Social Security and Medicare, as well as income tax. Additionally, most of the work performed will take place at your business location.
Independent contractors are self-employed individuals with whom you enter into a contract. The terms of the contract dictate the type of work performed, the rate of pay, and other information on the working relationship. While you provide information on the assignment or project, it is up to the independent contractor to determine how to complete your instructions.
You do not take taxes from the compensation you provide the independent contractor. Instead, that person must remit self-employment tax on their own returns. You also cannot fire the contractor until you satisfy the terms of the contract. If you are unhappy with the work and feel the person did not fill their obligations, you can take steps to claim breach of contract.