It’s the age-old business question. Which should you hire, an independent contractor or a new employee?
Employees generally cost more in terms of taxes, training, and benefits. Independent contractors can save you time and money, but the tradeoff is less control over the work process.
If you misclassify your workers, the IRS can penalize your business and the state government can go after you for back taxes and additional penalties. Recently California governor Jerry Brown signed a new law targeting employers who purposefully misclassify workers. And on top of all that, you could be setting yourself up to be sued by workers for back wages and benefits.
As a small business owner, I wanted to learn how to avoid those penalties. I sat down with small business attorney and expert Claire Kalia of Kalia Law Group. She helped me understand just how blurry the line between independent contractor and employee can be. With what I learned, I came up with a quiz to help you determine whether your needs lean toward hiring an employee or an independent contractor.
Remember, every company and every situation is different. In court, each independent contractor vs. employee case could be argued either way. This is not legal advice, and you should consult with your attorney before hiring to ensure you’re complying with all applicable federal and local laws.
1. For this project, I plan to give detailed instructions which might include things like where to get supplies, the order of tasks, and when and how to do the work:
2. I evaluate the completed project based on:
A. The steps taken to complete the project, and how the project was managed.
B. The end result of the project.
3. I provide training on how the job is done, including best practices and preferred software:
4. When my project requires additional resources in order to be completed, I:
A. Provide those resources as part of my business expenses.
B. Require the person assigned the project to cover those expenses (with or without reimbursement).
5. When the person assigned to the project incurs expenses, I:
A. Reimburse those expenses so long as they meet company expense criteria.
B. Do not reimburse those expenses, as they are figured into the cost of the project.
6. The person assigned to the project has:
A. Committed resources to the project, but will be reimbursed or does not stand to lose money.
B. Committed significant resources to the project, and risks losing money.
7. The person assigned to the project works:
A. Exclusively for me on this project and/or future projects.
B. With my company on this project, in addition to working with other companies on other projects.
8. The person assigned to the project is paid:
A. An hourly, weekly, or other time-based wage or salary.
B. A flat or project fee.
9. The contract between this person and my company is:
A. An overall contract that governs their relationship with the company regardless of project.
B. A contract that covers only the time we work together on the specified project.
10. The person assigned to the project receives:
A. Benefits including insurance, paid vacation, sick days, and disability insurance.
B. No benefits, and I do not pay taxes on the project fee.
11. When I hired this person to complete the project, we both understood:
A. This working relationship continues indefinitely, at-will, regardless of project.
B. This working relationship is finished upon project completion, with the opportunity to work on future projects on an individual basis.
12. The services provided by this person are:
A. Essential to the daily function of my business.
B. Not essential, and my business would not be significantly affected if and when this person leaves.
If you got mostly As, you should consider hiring a short or long term employee. You will be responsible for paying taxes and benefits in addition to working wages. In return, you’ll have more control over the progress of your projects and will be able to specify which software and best practices you would prefer the employee use, as well as how they should complete certain tasks. An employer-employee working relationship also may help future projects flow more smoothly.
If you got mostly Bs, you should consider hiring a short or long term independent contractor. You will have less control over the process, and likely won’t be able to dictate hours the contractor works or the kinds of software and equipment they use to carry out the task. However you will not be responsible for taxes and benefits, nor will you be required to provide resources (like a work-station and office supplies) so long as the end-result is mutually acceptable. You can fire your independent contractor if you feel they are not performing, but your contract may make you liable for all or part of the fee regardless of whether the project was completed.
To reiterate: I am not a lawyer. Please consult your own attorney to ensure you’re taking the right steps for your business.